6 GPA REVIEW SCHOOL OF THE PHILIPPINES AP-7607 Manila AUDITING PROBLEMS CPA Review AUDIT OF RECEIVABLES PROBLEM NO.1 In connection with your examination of the financial statements of JOHN, INC. for the year ended December 31, 2014, you were able to obtain certain information during your audit of the Accounts Recelvable and related accounts. ‘A. The December 31, 2014, balance in the Accounts Recelvable control account is P558,600. B, An aging schedule of the adcount receivable as of December 31, 2014, is presented below: Net Debit... Percentage To Be Applied After pr isa) NT Balance "/""* “Corrections Have Been Made" "0" 60 days and under P258,513 5 1 percent 61 to 90 days 710. 204,735 3 percent 91 to 120 days ( Yn) 59,886 5 6 percent Over 120 days (200) 35,466 2) Ge Definitely uncoltectible, P6,300; __ the remainder is estimated to be 558,600 551% 25% uncollectible. ig ‘14300 C. The only entries made in the Bad Debt Expense account were: 1. Adebit on December 31 for the amount of the credit to the Allowance for Bad Debts. "©... 2. A credit for P4,110 on November 30, 2014, and a debit to Allowance for Bad Debts because of a bankruptcy. The related sale took place on October 1, 2014.7". «go e D. The Allowance for Bad Debts schedule is presented below: Cig, TO Debit Credit Balance January 1, 2014 P13,125 November 30, 2014 P4,110 9,015 December 31, 2014 (P558,600 x 5%) 727,930 P36,945 - “0° vf pel E.. There is a credit balance in one account receivable (61 to 90 days) of P7,260; it represents an advance on a sales contract. £0 ogy DE 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, 20147 A. P555,450 B. P559,560 C. P540,930 sO. P548,190 2. How much is the adjusted balance of the Allowence far Bad Debts as of December 31, 2014? A. P19,706 B,_P19,583 Cc. P19,830 D, p19,147 3. How much is the Bad Debts expense for the year 2014? A. P16,991 By P16,868 C. Piz, 115 D. P27,930 4, How much is the net adjustment to the Bad Debts expense account? A, P6,952 credit B, P6705 credit —C.-P6,829 credit D. P4,110 debit ve Suro ittPROBLEM NO. 2 DOK Inc. had the following long-term receivable account balances at December 31, 2013. Note receivable from sale of division 1,500,000 , Note receivable from officer 400,000 ‘Transactions during 2014 and other information relating to Dok’s long-term receivables were as follows. 1. The P1,500,000 note receivable is dated May 1, 2013, bears interest at 9%, and represents the balance of the consideration received from the sale of Dok’s electronics division to York Company. Principal payments of P500,000 plus appropriate interest are due on May 1, 2014, 2015, and 2016. The first principal and Interest payment was made on May 1, 2014. Collection of the note installments is reasonably assured. = 154) D2 2. The P400,000 note receivable is dated December 31, 2013, bears Interest at 8%, and is due on December 31, 2016, The note is due from May Rox, president of Dok Inc. and is collateralized by 10,000 shares of Dok’s ordinary shares. Interest is payable annually on December 31, and all interest payments were paid on their due dates through December 31, 2014. The quoted market price of Dok’s ordinary shares was P45 per share on December 31, 2014. 1111 3. On April 1, 2014, Dok sold a patent to Pen Company in exchange for a P100,000 zero- interest-bearing note due on April 1, 2016. There was no established exchange price for the patent, and the note had no ready market. The prevailing rate of interest for a note of this type at April 1, 2014, was 12%. The present value of Pl for two periods at 12% is 0.797 (use this factor). The patent had a carrying value of P40,000 at January 1, 2014, and the amortization for the year ended December 31, 2014, would have been P8,000. The collection of the note receivable from Pen is reasonably assured. 4,4 4. On July 1, 2014, Dok sold a parcel of land to Sprinter Company for 200,000 under an installment sale contract. Sprinter made a P60,000 cash down payment on July 1, 2014, and signed a 4-year 11% note for the P140,000 balance. The equal annual payments of principal and interest on the note will be P45,125 payable on July 1, 2015, through July 1, 2018. The land could have been sold at an established cash price of P200,000. The cost of the land to Dok was P150,000, Circumstances are such that the collection of the - installments on the note is reasonably assured. Based on the preceding information, calculate the following: a4. af, C1. Accrued interest receivable on December 31, 2014 oT Aen iy “RL P75,400 B. P99,700 C. P67,700 D. 97,700 D —_2.‘Camying value on December 31, 2014, of the zero-interest-bearing note from sale of patent A. P79,700 B. P72,527 C, P92,827 D, P86,873 | FE 3, Interest income for the year ended December 31, 2014 A, P151,873 B. P137,527 C. P154,264 D. P159,573 4 Current portion of long-term receivables on December 31, 2014 A. P537,425 B. P529,725 C. P545,125 D. P640,000 5. Total long-term receivables on December 31, 2014 A. P1,103,102 B> P1,097,148 C. P1,081,748 D. P1,087,702 fe Sle of diizer fol. Dfarfi4 CSW - 0.5m) 1900 1 $00) Sonos qo post 741) Page 2 of 6 Pages oooy St Be \ tale wr lend (iM)CPAR = MANILA .APT607 ~ AUDIT OF RECEIVABLES PROBLEM NO. 3 LENNON ASSOCIATES loaned Mc Cartney Company P750,000 on January 1, 2011. The terms of the loan were payment in full on January-1, 2016, plus annual interest payments at 11%. ‘The interest payment was made as scheduled on January 1, 2012; however, due to financial setbacks, Mc Cartney was unable to make its 2013 interest payment. Lennon considers the Joan impaired and projects the following cash flows from the loan as of December 31, 2013 and 2014. Assume that Lennon accrued the interest at December 31, 2012, but did not continue to accrue interest due to the impairment of the loan. The prevailing interest rate for similar type of note as of December 31, 2013 and 2014 is 10%. Projected Cash Flows Amount Projected As OF Date of Flow December 31,2013 December 31, 2014 December 31, 2014.4 P 50,000 P 50,000 5 December 31, 2015 100,000 150,000 > December 31, 2016 200,000 300,000 405) December 31, 2017 300,000 250,000 503.046 December 31, 2018 100,000 S746 Ser4os REQUIRED: 1. Prepare the valuation adjusting entry at December 31, 2013. 2. Prepare the journal entry to record the P50,000 receipt on December 31, 2014. we i 3. Prepare the valuation adjusting entry at December 31, 2014. Guia , 4 . Prepare the 2015 journal entries, assuming the receipt of P150,000 as scheduled; also assume that estimates for future cash flows remain the same as they were at the end of 2014. Covhyg 1150 PROBLEM NO. 4 D1. In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate? A. Equipment C. Bank charges B. Bonds payable D. Sales 1D | 25 An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to Support management's financial statement assertion of A, Existence C. Valuation B. Rights and obligations D. Completeness D 3% 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. C. Lapping of year-end accounts receivable, B, Unrecorded sales discounts. D. Inflated sales for the year. . Cut-off tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of A, Presentation and disclosure C. Rights and obligations B. Completeness D. Existence e * (5. The auditor finds a situation in which one person has the ability collect receivables, make deposits, issue credit mernas, and record receipt of payments. The auditor suspects these CPAR - MANILA |AP7607 ~ AUDIT OF RECEIVABLES 10. 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 a 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 journal. D. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the cash receipts journal. Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable? A. Vouching amounts in the subsidiary ledger to details on shipping documents. B. Comparing receivable turnover ratios with industry statistics for reasonableness. . Inquiring about receivables pledged under loan agreements. D. Assessing the allowance for uncollectible accounts for reasonableness. In confirming accounts receivable, an auditor decided to confirm customers’ account balances rather than individual invoices. Which of the following most likely would be included with the client's confirmation letter? A. An auditor-prepared letter explaining that a non-response may cause inferefice that tthe account balance is correct. B. A dient-prepared letter reminding the customer that a non-response will tause a second request to be sent. An audltor-prepared letter requesting the customer to supply missing and incorrect information directiy to the auditor. D. A client-prepared statement of account showing the details of the customer’s account balance. Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipients? A. “This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope.” B. “Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records.” C. “IF you do not report any differences within fifteen days, it will be assumed that this statement is correct." D. “The following invoices have been selected for confirmation and represent amounts that are overdue.” Confirmation, which is a specific type of inquiry, Is the process of obtaining a representation of information or of an existing condition directly from a third party. Two assertions for which confirmation of accounts receivable balances provides primary evidence are A. Completeness and valuation . Rights and obligations and existence B. Valuation and rights and obligations —_-D._Existence and completeness Auditors may use positive or negative forms of confirmation requests for accounts receivable. An auditor most likely will use ‘A. The positive form to confirm all balances regardless of size. B. A combination of the two forms, with the positive form used for large balances and the negative form for the small balances, C. A combination of the two forms, with the positive form used for trade receivables and the negative form for other receivables. D. The positive form when the combined assessed level of inherent and control risk for assertions related to receivables is acceptably low, and the negative form when It is unacceptably high.5 o ————E eee A UE EET EE EEE 11. 12. 13. 14. 15. 16. 17. ‘The negative request form of accounts receivable confirmation may be used when the Combined Assessed Level Of ‘Number of Small Consideration By Inherent and Control Risk Is Balances Is ‘The Recipient is A Low Many Ukely B. Low Few Unlikely Cc. High Few Likely D. High Many Likely In the confirmation of accounts receivable, the auditor would most likely ‘A. Request confirmation of a sample of the inactive accounts. B. Seek to obtain positive confirmations for at least 50% of the total peso amount of the receivables, . Require confirmation of all receivables from agencies of the government. D. Require that confirmation requests be sent within 1 month of the fiscal year-end. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because A. A majority of recipients usually lack the willingness to respond objectively. B. Some recipients may report incorract balances that require extensive follow-up. C. The auditor cannot infer that all nonrespondents have verified their account information. D. Negative confirmations do not produce evidence that is statistically quantifiable. To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would ‘A. Examine the shipping documents that provide evidence for the existence assertion. B. Verify the sources and contents of the faxes in telephone calls to the senders. . Consider the faxes to be nonresponses and evaluate them as unadjusted differences. D. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted. é ‘An auditor confirms @ representative number of open accounts receivable as of December 31 and investigates respondents’ exceptions and comments. By this procedure, the auditor is most likely to learn of which of the following? ‘A. One of the cashiers has been covering a personal embezzlement by lapping. B. One of the sales clerks has not been preparing charge slips for credit sales to family and friends. C. One of the computer processing control clerks has been removing all sales invoices applicable to his account from the data file, D. The credit manager has misappropriated remittances from customers whose accounts have been written off. ‘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 debtors are not returned. B. Negative confirmations sent to debtors are not returned. C. Most of the returned negative confirmations indicate that the debtor owes a larger balance than the amount being confirmed. D. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than the amount being confirmed. Confirmation of accounts recelvabie’ $a generally accepted auditing procedure. The presumption that an auditor will confirm accounts receivable is not overcome if A, Based on prior years’ audit experience, response rates will be inadequate, B. Based on experience with similar engagements, responses are expected to be unreliable, C, The accounts receivable are immaterial. D. The combined assessed level of inherent and control risk is high.D (SPAR - MANILA |AP7607 — AUDIT OF RECEIVABLES 18. Which of the foliowing procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies ta second requests? ‘A. Review the cash receipts journal for the month prior to year-end. B. Intensify the study of internal control conceming the revenue cycle. | C. Increase the assessed level of detection risk for the existence assertion. | D. Inspect the shipping records documenting the merchandise sold to the debtors. 19. Which of the following is the greatest drawback of using subsequent collections evidenced only by a deposit slip as an alternative procedure when responses to positive accounts receivable confirmations are not received? ‘A. Checking subsequent collections can never be used as an alternative auditing procedure, | B. By examining a deposit slip only, the auditor does not know whether the payment Is for the receivable at the balance sheet date or a subsequent transaction. C. A deposit slip is not recelved directly by the auditor. D. A customer may not have made a payment on a timely basis. P) 20. All of the following are examples of substantive tests to verify the valuation of net accounts receivable except the A. Recomputation of the allowance for bad debts. B. Inspection of accounts for current versus noncurrent status In the statement of financial position. C. Inspection of the aging schedule and credit records of past due accounts. D. Comparison of the allowance for bad debts with past records. —END—