Auditing and Assurance Services: Theory and Practice [for ACYASR2] (Tugas & Bendo)

------------------------------------------------------------------------------------------------------------------------------------------------------------

AUDIT OF RECEIVABLES

COLLABORATIVE AUDIT WORKING PAPER ON RECEIVABLES

PRELIMINARIES (GUIDE QUESTIONS)

(1) Discuss the following terms as defined in ISA 505 (par. 6) and ISA glossary of terms:
(a) External confirmation
(b) Positive confirmation request
(c) Negative confirmation request
(d) Non-response
(e) Exception
(2) Discuss the instances wherein the auditors shall consider whether external confirmation
procedures are to be performed as substantive audit procedures (ISA 330, par. 19 and A48-A51)
(3) Discuss the external confirmation procedures to obtain audit evidence in accordance with ISA 505,
par. 2 and 3, par. 7 and A1-A7. (Who prepares the external confirmation and why? Who sends
the external confirmation and why? To whom shall the external party reply to the confirmation
letter and why?)
(4) What is the effect if management refuses to allow the auditor to send a confirmation request (ISA
505, par. 8-9 and A8-A10)?
(5) When is it appropriate to use a positive confirmation request, a positive blank confirmation request
(ISA 505, A5) and a negative blank confirmation request (ISA 505 par. 15 and A23) respectively?
(6) What should the auditor do on the results of the external confirmation procedures? (ISA 505, par.
10-14 and A11-A22)
(7) How do auditors evaluate the evidence obtained through an external confirmation procedure? (ISA
505, par 16 and A24-A25)

INTEGRATING QUESTION:

Evaluate the statement below:

During your audit of a certain client, the auditors sent confirmation request to customers whose
accounts had been assessed as doubtful during the year under audit. An executive of the client
protested, saying “You people should be verifying that the receivables on the books are collectible.
We know the ones we assessed as doubtful are no good.”

------------------------------------------------------------------------------------------------------------------------------------------------------------
Copyright © 2020 Tugas & Bendo. All rights reserved.
No part of this learner’s material may be reproduced, stored, or transmitted in any form or by any means – electronic,
mechanical, or otherwise – without the written consent of the authors.
Auditing and Assurance Services: Theory and Practice [for ACYASR2] (Tugas & Bendo)
------------------------------------------------------------------------------------------------------------------------------------------------------------

CASE A: CONFIRMATION

In the audit of ABC Company, you were provided with an accounts receivable balance of P11,700,000.
Based on the on the auditor’s assessments of the risks, external positive confirmation is necessary to
confirm the balances provided for in the subsidiary ledger:

Customer Balances
June Co. ₱ 5,000,000
March Co. 2,200,000
April Co. 600,000
November Co. 1,300,000
August Co. 1,100,000
May Co. 700,000
December Co. 2,500,000
Total ₱13,400,000

The confirmation responses were summarized as follows:

Customer Customer’s response Audit findings

June Co. We no longer have any outstanding The settlement remained unrecorded
balance as of December 31, 2021 as we in the company records because an
have settled the related bill in full. Please employee was discovered covering up
see attached deposit slip and official his defalcation by performing lapping.
receipt dated December 29, 2021.
March Co. How can we owe you something if we did Investigation revealed that goods sold
not receive any merchandise from your for P2,200,000 were shipped to March
company? Co. on December 29, 2021, terms
FOB shipping point. The goods were
lost in transit and the shipping
company has acknowledged its
responsibility for the loss of the
merchandise.
April Co. We made a partial payment of P300,000 Upon checking with the auditor
with a check dated December 28, 2021 handling the cash account, the check
and we’ll make the final payment by the payment was received by the
end of February. company in December 29, 2021. It
was deposited on the first banking
day of 2022 and was subsequently
cleared based on the bank statement.
November Co. The goods sold on December 1 were The outstanding balance pertains to
returned on December 16, 2021. various transactions with the
customer. The client failed to record
credit memo no. 23 for P800,000. The
merchandise was included in the
ending inventory at cost.
May Co. We do not owe you anymore. We already The sale of merchandise on
paid our accounts as evidenced by OR # December 21, 2021 was paid by May
123560. Co. on January 14, 2022.
December Co. We already made full payment last Upon checking with the auditor
December 29, 2021. Please see attached handling the cash account, the
deposit slip and please issue the collection remained unrecorded
corresponding official receipt. because it was a direct deposit to the
bank and no advice was provided for
by the customer to inform the client
of the said payment.

Despite follow-up efforts, August Co. failed to respond to the external positive confirmation. Thus, the
auditor made alternative audit procedures to determine the existence of the said receivable. Upon
inspection of the related documents and inquiry with client personnel, you determined that the
receivable was settled in full on January 1, 2022 as evidenced by OR# 123543.

------------------------------------------------------------------------------------------------------------------------------------------------------------
Copyright © 2020 Tugas & Bendo. All rights reserved.
No part of this learner’s material may be reproduced, stored, or transmitted in any form or by any means – electronic,
mechanical, or otherwise – without the written consent of the authors.
Auditing and Assurance Services: Theory and Practice [for ACYASR2] (Tugas & Bendo)
------------------------------------------------------------------------------------------------------------------------------------------------------------

Required:
(1) Prepare an audit working paper for the computation of the correct receivable balance.
(2) Prepare a compound adjusting journal entry to update the receivable balance as of December 31,
2021.
(3) Compute for the net adjustment in the cash balance resulting from the audit findings.

PRELIMINARIES (GUIDE QUESTIONS)

(1) Discuss the key points for testing management’s accounting estimates in relation to credit losses
under ISA 540 (Revised), par. 22-30, and relevant appendices.
(2) Discuss the key points for disclosures related to accounting estimates under ISA 540 (Revised),
par. 31 and relevant appendices.
(3) Discuss the key points for the overall evaluation under ISA 540 (Revised), par. 33-36 and relevant
appendices.

CASE B: EXPECTED CREDIT LOSS (MEASUREMENT)

The audited balance of John Company’s total receivables was determined to be P3,000,000 after doing
confirmation from external parties, inquiry of management and inspection of related documents.
However, the related allowance had an unadjusted balance of ₱8,000 after recognizing ₱5,000 credit
impairment losses (doubtful accounts expense) for the year. To test the adequacy of the allowance,
you prepared a schedule of receivables according to their age and assessed the probability of default
and loss given default using the general expected credit loss (ECL) model as follows:

Total Age
receivables 0-30 31-60 61-90 91-150 over150
days days days days days
3,000,000 1,500,000 600,000 300,000 200,000 400,000

Performing 10%
Loss given default Underperforming 25%
Non-performing 50%
Performing 5%
Probability of default Underperforming 30%
Non-performing 80%

The client has a normal credit term of 60 days.

Required:
(1) Prepare an audit working paper for the computation of the correct allowance for credit losses.
(2) Prepare an adjusting journal entry to record the additional credit losses.
(3) Compute for the total credit loss related to receivables to be reported in the 2021 Audited Financial
Statements.

------------------------------------------------------------------------------------------------------------------------------------------------------------
Copyright © 2020 Tugas & Bendo. All rights reserved.
No part of this learner’s material may be reproduced, stored, or transmitted in any form or by any means – electronic,
mechanical, or otherwise – without the written consent of the authors.
Auditing and Assurance Services: Theory and Practice [for ACYASR2] (Tugas & Bendo)
------------------------------------------------------------------------------------------------------------------------------------------------------------

CASE C: RECEIVABLE FINANCING

In your audit of James Company’s receivables for the year ended December 31, 2021, you were able
to gather the following information:

Balances from the December 31, 2021

Subsidiary Ledger
10% Note from ABC Co. ₱1,000,000
12% Note from DEF Co. 4,500,000
6% Note from GHI Co. 2,700,000
Total Notes Receivable ₱8,200,000

▪ The company records all interest income only upon receipt of the interest from the borrower. The
balance of interest income for the year was ₱820,000.
▪ The 10% note was issued by ABC Co. on April 1, 2019 with interest payable annually. The interest
payments were made from 2020 to 2021 without any default and the entity is certain that the
borrower would be able to honor its commitment.
▪ The 12% note was received on November 1, 2020. The principal of the note is due in 4 equal
annual installments beginning November 1, 2021. The borrower was able to make timely payments
for 2021 and is expected to make the necessary payments for the next three periods.
▪ The 6% note was dated October 1, 2021 and will mature in 4 months. Because of cash
requirements, the client discounted it to a bank without recourse on December 31, 2021 for 5%.
The entity recorded the receipt of the proceeds by debiting cash and crediting loans payable.

Required:
(1) Prepare the following side-by-side:
(a) Journal entries per client;
(b) Journal entries per audit;
(c) Proposed adjusting journal entries
(2) Show supporting computations for your proposed adjusting journal entries.

------------------------------------------------------------------------------------------------------------------------------------------------------------
Copyright © 2020 Tugas & Bendo. All rights reserved.
No part of this learner’s material may be reproduced, stored, or transmitted in any form or by any means – electronic,
mechanical, or otherwise – without the written consent of the authors.