Since 1977

AUDITING PROBLEMS OCAMPO/SOLIMAN/OCAMPO

AP.2905-Audit of Receivables OCTOBER 2020

INTERNAL CONTROL MEASURES

1. Proper internal control over receivables should observe 2. Notes receivable custodian should not have access to
the following: cash or to the accounting record.
a. Sales must be separated from the accounting for
them. 3. A responsible official who does not have access to the
b. Accounting for sales must be separated from the notes should approve note renewals as well as charge-
receipt of cash arising from the receivables. offs of defaulted notes in writing.
c. Returns, allowances, discounts, and uncollectible
charge-offs must be properly approved and 4. Proper procedures should be adopted for the follow-up
separated from the cash receipts function. of defaulted notes.
d. Periodically, receivables should be aged in order to
determine the actions and efficiency of the credit
department.

SUBSTANTIVE AUDIT OF RECEIVABLES

Sales and Accounts Receivable Balances Sales Transactions

Existence or occurrence: Sales and accounts receivable Completeness: Sales transactions that occurred are
are for shipments made to customers recorded
1. Confirm accounts receivable and perform procedures For a sample of shipping documents, trace sales invoice
for confirmations not returned. and entry into sales journal and accounts receivable
2. Perform analytical procedures to test sales and subsidiary ledger. Perform cutoff tests.
accounts receivable.
Occurrence: Recorded sales are for shipments actually
Completeness: Sales transactions that occurred and made to customers
existing receivables are recorded
For a sample of entries in the sales journal, compare sales
3. Perform a test of sales cutoff. invoice copy, customer order, and sales invoice.

Rights and obligations: Accounts receivable are owned by
the client
4. Review minutes of the board of directors’ meetings,
inquire of the client personnel, read contracts and
agreements, and confirm with lenders any indications
that accounts have been assigned, sold, or pledged.
Valuation and allocation: Accounts receivable are properly
valued
5. Verify mathematical accuracy of the accounts
receivable aging schedule and trace it to the accounts
receivable subsidiary ledger.
6. Test the adequacy of the allowance for uncollectible
accounts.
Classification: Sales and accounts receivable transactions
have been recorded in the proper accounts
For a sample of entries in the sales journal, verify the
accuracy of account coding.
Accuracy (Valuation): Sales are correctly billed and
recorded
For a sample of entries in the sales journal, (a) examine
sales invoice, shipping document, and customer for
consistency of descriptions and quantities; (b) examine
sales orders for credit approval; and (c) check prices and
extensions. Foot sales journal and general ledger account.

Presentation and disclosure: Sales and accounts

receivable are properly presented and disclosed in
accordance with GAAP.
7. Review financial statements and perform analytical
procedures to determine whether accounts are
classified and disclosed in accordance with GAAP.

- end -

Page 1 of 7 www.teamprtc.com.ph AP.2905

PROBLEM NO. 1
Accounts with debit balances P 441,100
The December 31, 2019 statement of financial position of Advances to officers 16,400
Help Company included the following information: Accounts with credit balance (15,000)
Notes receivable P 598,000 Accounts receivable per GL P 442,500
Less: NR discounted (380,000) P 218,000
The credit balance in customer’s account represents
Accounts receivable P2,240,000 collection from a customer whose account had been
Less: Allow. for D.A. ( 141,000) 2,099,000 written-off as uncollectible in 2019.
Total receivables P2,317,000
Accounts receivable for more than a year totaling P21,000
The following transactions occurred during 2020: should be written off.
1. Sales on account P8,812,000 Confirmation replies received directly from customers
2. Collections on accounts 8,410,000 disclosed the following exceptions:
3. Accounts receivable written off as
uncollectible 138,000 Customer’s
4. Notes receivable collected 290,000 Customer Comments Audit Findings
5. Customer notes received in payment Jessie The goods sold on The client failed to
of accounts receivable 740,000 December 1 were record credit memo
6. Notes receivable discounted paid at returned on no. 23 for P12,000.
maturity 360,000 December 16, 2020. The merchandise
7. Notes receivable discounted was included in the
defaulted, including interest of ending inventory at
P200 and a P100 fee. This cost.
amount is expected to be collected
Robert We do not owe this Investigation
in 2021 20,300
amount *%#@ (bad revealed that goods
8. Proceeds from customer notes
word). We did not sold for P16,000
discounted (face value P450,000,
receive any were shipped to
accrued interest income, P2,000) 448,500
merchandise from Robert on December
9. Collections on accounts previously
your company. 29, 2020, terms FOB
written off 5,000
shipping point. The
10. Sales returns and allowances 20,000
goods were lost in
11. Required allowance for doubtful
transit and the
accounts based on impairment
shipping company
assessment at year end 12,000
has acknowledged its
responsibility for the
QUESTIONS:
loss of the
Based on the above and the result of your audit, answer merchandise.
the following:
Anne I am entitled to a Anne is an employee
1. The loss from discounting of notes receivable is 10% employee of Praktis. Starting
a. P3,500 c. P1,500 discount. Your bill November 2020, all
b. P2,000 d. P 0 should be reduced company employees
by P1,200. were entitled to a
2. The adjusted balance of Accounts Receivable as of special discount.
December 31, 2020 is
a. P2,479,000 c. P1,729,000 Jay-ar We have not yet sold Merchandise billed
b. P1,739,000 d. P1,744,000 the goods. We will for P18,000 were
remit the proceeds consigned to Jay-ar
3. The adjusted balance of Notes Receivable as of as soon as the goods on December 30,
December 31, 2020 is are sold. 2020. The goods
a. P238,000 c. P668,000 cost P13,000.
b. P688,300 d. P688,000
Roy We do not owe you The sale of
4. The amount to be reported as trade and other P20,000. We merchandise on
receivables in the entity’s statement of financial already paid our December 18, 2020
position as of December 31, 2020 is accounts as was paid by Roy on
a. P1,970,300 c. P1,965,300 evidenced by OR # January 6, 2021.
b. P1,950,000 d. P1,945,000 1234.
5. When designing audit procedures, tracing of source Roldan Reduce your bill by This amount
documents to the customers subsidiary ledger and P1,500 represents freight
subsequently to the general ledger is done to satisfy paid by the customer
what assertion? for the merchandise
a. Valuation c. Completeness shipped on
b. Cutoff d. Classification December 17, 2020,
terms, FOB
destination-collect.
PROBLEM NO. 2
In connection with the audit of the financial statements of
Praktis Corporation, your audit senior instructed you to
examine the company’s accounts receivable.

From the schedule of accounts receivable as of December

31, 2020, you determined that this account includes the
following:
REQUIRED: December 31, 2020 is presented below:
1. Adjusting entries as of December 31, 2020. Percentage to be applied
2. Adjusted balance of Accounts Receivable as of Net debit after corrections have
December 31, 2020. P387,400 Age balance been made
60 days &
3. Confirmation, which is a specific type of inquiry, is the under P387,800 1 percent
process of obtaining a representation of information or 61 to 90
of an existing condition directly from a third party. days 307,100 2 percent
Two assertions for which confirmation of accounts 91 to 120
receivable balances provides primary evidence are days 89,800 5 percent
a. Completeness and valuation Over 120 Definitely uncollectible,
b. Rights and obligations and existence days 53,200 P9,000; the remainder is
c. Valuation and rights and obligations estimated to be 25%
d. Existence and completeness P837,900 uncollectible.

4. The negative request form of accounts receivable  The Allowance for Doubtful Accounts schedule is
confirmation may be used when the presented below:
Combined Debit Credit Balance
Assessed Level January 1, 2020 P19,700
Of Inherent Number of Consideration November 30, 2020 P6,100 13,600
and Control Small by the December 31, 2020
Risk Is Balances is Recipient is (P837,900 x 5%) P41,895 P55,495
a. Low Many Likely
b. Low Few Unlikely  Entries made in the Doubtful Accounts Expense
c. High Few Likely account were:
d. High Many Likely 1. A debit on December 31 for the amount of the
5. Which of the following procedures would an auditor credit to the Allowance for Doubtful Accounts.
most likely perform for year-end accounts receivable 2. A credit for P6,100 on November 30, 2020, and a
confirmations when the auditor did not receive replies debit to Allowance for Doubtful Accounts because
to second requests? of a bankruptcy. The related sales took place on
a. Review the cash receipts journal for the month October 1, 2020.
prior to year-end.
b. Intensify the study of internal control concerning  There is a credit balance in one account receivable (61
the revenue cycle. to 90 days) of P11,000; it represents an advance on a
c. Increase the assessed level of detection risk for the sales contract.
existence assertion
d. Inspect the shipping records documenting the QUESTIONS:
merchandise sold to the debtors. Based on the above and the result of your audit, answer
6. If management refuses to allow the auditor to send a the following:
confirmation request, the auditor shall: 1. How much is the adjusted balance of Accounts
a. Inquire as to management’s reasons for the Receivable as of December 31, 2020?
refusal, and seek audit evidence as to their validity a. P837,900 c. P833,800
and reasonableness. b. P839,900 d. P822,800
b. Evaluate the implications of management’s refusal
on the auditor’s assessment of the relevant risks of 2. How much is the adjusted balance of the Allowance for
material misstatement, including the risk of fraud, Doubtful Accounts as of December 31, 2020?
and on the nature, timing and extent of other audit a. P25,475 c. P25,255
procedures. b. P25,780 d. P41,895
c. Perform alternative audit procedures designed to 3. How much is the Doubtful Accounts expense for the
obtain relevant and reliable audit evidence. year 2020?
d. All of these. a. P21,180 c. P41,985
b. P20,655 d. P20,875
PROBLEM NO. 3 4. How much is the net adjustment to the Doubtful
Accounts expense account?
In connection with your examination of the financial a. P14,920 credit c. P20,875 credit
statements of Ringo, Inc. for the year ended December b. P14,615 credit d. P15,140 debit
31, 2020, you were able to obtain certain information
during your audit of the accounts receivable and related 5. All of the following are examples of substantive tests
accounts. to verify valuation of net accounts receivable except
the
 The December 31, 2020 balance in the Accounts a. Re-computation of the allowance for bad debts.
Receivable control account is P837,900. b. Inspection of the aging schedule and credit records
of past due accounts.
c. Comparison of the allowance for bad debts with
past records.
d. Inspection of accounts for current versus non-
current status in the statement of financial
position.

SOLUTION GUIDE #2:

 An aging schedule of the accounts receivable as of Category Balance Rate Allowance
 60 days and under 387,800 1% 3,878 Total 734,400 825,600 1,072,800 2,632,800
Less COS 2,106,240
61 - 90 days 318,100 2% 6,362
Gross profit 146,880 165,120 214,560 526,560
91 - 120 days 83,700 5% 4,185

Over 120 days 44,200 25% 11,050 Computation of Credit Sales

Total 833,800 25,475 2018 2019 2020

Balance, 12/31/20 3,200 7,200 112,800
Add collections:

PROBLEM NO. 4
2018 595,200 - -
The following information is based on the first audit of 2019 60,000 647,200 -
Paul Company. 2020 8,000 67,200 835,200
Total 666,400 721,600 948,000
The client has not prepared financial statements for 2018,
2019, or 2020. During these years, no accounts have PROBLEM NO. 5
been written off as uncollectible, and the rate of gross
profit on sales has remained constant for each of the three The balance sheet of Yoko Corporation reported the
years. following long-term receivables as of December 31, 2019:
Note receivable from sale of plant P6,000,000
Prior to January 1, 2018, the client used the accrual Note receivable from officer 1,600,000
method of accounting. From January 1, 2018 to December
31, 2020, only cash receipts and disbursements records In connection with your audit, you were able to gather the
were maintained. When sales on account were made, they following transactions during 2020 and other information
were entered in the subsidiary accounts receivable ledger. pertaining to the company’s long-term receivables:
No general ledger postings have been made since
December 31, 2018. a. The note receivable from sale of plant bears interest at
12% per annum. The note is payable in 3 annual
As a result of your examination, the correct data shown installments of P2,000,000 plus interest on the unpaid
balance every April 1. The initial principal and interest
below are available: payment was made on April 1, 2020.
12/31/17 12/31/20
Accounts receivable balances: b. The note receivable from officer is dated December 31,
Less than one year old P61,600 P112,800 2019, earns interest at 10% per annum, and is due on
One to two years old 4,800 7,200 December 31, 2022. The 2020 interest was received
Two to three years old - 3,200 on December 31, 2020.
Over three years old - 8,800
P66,400 P132,000 c. The corporation sold a piece of equipment to Yes, Inc.
Inventories 146,400 124,160 on April 1, 2020, in exchange for an P800,000 non-
interest bearing note due on April 1, 2022. The note
Accounts payable for inventory had no ready market, and there was no established
purchased 20,000 44,000 exchange price for the equipment. The prevailing
interest rate for a note of this type at April 1, 2020,
Cash received on was 12%. The present value factor of 1 for two
AR in: 2018 2019 2020 periods at 12% is 0.797.
Applied to:
Current year d. A tract of land was sold by the corporation to No Co.
sales P595,200 P647,200 P835,200 on July 1, 2020, for P4,000,000 under an installment
Accounts of the sale contract. No Co. signed a 4-year 11% note for
prior year 53,600 60,000 67,200 P2,800,000 on July 1, 2020, in addition to the down
Accounts of two payment of P1,200,000. The equal annual payments
year prior 2,400 1,600 8,000 of principal and interest on the note will be P902,500
Total P651,200 P708,800 P910,400 payable on July 1, 2021, 2022, 2023, and 2024. The
land had an established cash price of P4,000,000, and
Cash sales 68,000 104,000 124,800 its cost to the corporation was P3,000,000. The
collection of the installments on this note is reasonably
Cash disbursements assured.
for inventory
purchased 750,000 728,400 581,600 QUESTIONS:

REQUIRED: Based on the above and the result of your audit, determine
the following:
Based on the above and the result of your audit, compute
for the gross profit for the years ended December 31, 1. Noncurrent receivables as of December 31, 2020
2018, 2019 and 2020. a. P9,037,600 c. P6,500,484
b. P7,037,600 d. P6,443,100
2. Current portion of long-term receivables as of
December 31, 2020
a. P2,000,000 c. P2,594,500
b. P2,902,500 d. P 0
SOLUTION GUIDE:
3. Interest income for the year 2020
2018 2019 2020 Total a. P 854,000 c. P 911,384
Sales – Cash 68,000 104,000 124,800 296,800
b. P1,091,384 d. P1,008,000
Sales - Credit 666,400 721,600 948,000 2,336,000
4. Accrued interest receivable as of December 31, 2020 January 1, 2020
a. P360,000 c. P514,000
Notes receivable P600,000
b. P571,384 d. P674,000
Land P400,000
5. Which of the following pairs of accounts would an Gain on sale of land 200,000
auditor most likely analyze on the same working
paper? December 31, 2020
a. Notes receivable and interest income.
Cash P224,000
b. Accrued interest receivable and accrued interest
Notes receivable P200,000
payable.
Interest income 24,000
c. Notes payable and notes receivable.
d. Interest income and interest expense.
Pedro reported the notes receivable in its statement of
financial position at December 31, 2020 as part of trade
and other receivables.
SOLUTION GUIDE #1&2:

Non-current QUESTIONS:
Based on the above and the result of your audit, answer
NR-sale of plant:
the following:
CA, 12/31/20 4,000,000
Less principal inst. due, 4/1/21 2,000,000 2,000,000 1. The correct gain on sale of land is
a. P103,105 c. P120,061
NR-officer, due 12/31/22 1,600,000 b. P 94,868 d. P200,000
NR-sale of equipment: 2. The correct interest income for 2020 is
CA, 4/1/20 (P800T x .797) 637,600 a. P74,230 c. P70,435
Discount amort. 57,384 694,984 b. P72,809 d. P24,000
(P637,600x12%x9/12)
3. Profit for 2020 is overstated by
NR-sale of land: a. P50,460 c. P54,902
CA, 12/31/20 b. P31,130 d. P 0
Less principal inst. due, 7/1/21
Total P902,500 2,800,000 4. The correct carrying amount of the notes receivable at
Interest (308,000) 594,500 2,205,500 December 31, 2020 is
a. P400,000 c. P368,870
Total 6,500,484 b. P345,098 d. P349,540
5. The entity’s working capital at December 31, 2020 is
overstated by
PROBLEM NO. 6 a. P235,765 c. P182,476
b. P232,936 d. P 0
On January 1, 2020, Pedro Company sold land that
originally cost P400,000 to Buyer Company. As payment,
Buyer gave Pedro Company a P600,000 note. The note
SOLUTION GUIDE #1:
bears an interest rate of 4% and is to be repaid in three
annual installments of P200,000 (plus interest on the
outstanding balance). The first payment is due on Date P I (4%) Total PVF @ PV, 1/1/20
December 31, 2020. The market price of the land is not 14%
reliably determinable. The prevailing rate of interest for 12/31/20 200T 24T 224T 0.8772 196,493
notes of this type is 14% on January 1, 2020 and 15% on
December 31, 2020. 12/31/21 200T 16T 216T 0.7695 166,212

12/31/22 200T 8T 208T 0.6750 140,400

600T 503,105

Pedro made the following journal entries in relation to the

sale of land and the related note receivable:
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 DO-IT-YOURSELF (DIY) DRILL
PROBLEM NO. 1 2. The necessary adjusting journal entry to adjust the
allowance for doubtful accounts as of December 31,
Professional Company produces paints and related
2020 would include a credit to allowance for doubtful
products for sale to the construction industry throughout
accounts of:
Metro Manila. While sales have remained relatively stable
a. P27,300 c. P49,800
despite a decline in the amount of new construction, there
b. P77,100 d. P22,300
has been a noticeable change in the timeliness with which
the company’s customers are paying their bills. 3. An aging analysis of accounts receivable would provide
an indication as to the
The company sells its products on payment terms of 2/10, a.Validity of the accounts.
n/30. In the past, over 75 percent of the credit customers b.Integrity of the credit grantors.
have taken advantage of the discount by paying within 10 c. Collectibility of the accounts.
days of the invoice date. During the year ended December d.Solvency of customers.
31, 2020, the number of customers taking the full 30 days
4. Which account balance is most likely to be misstated if
to pay has increased. Current indications are that less
an aging of accounts receivable is not performed?
than 60% of the customers are now taking the discount.
a. Allowance for bad debts.
Uncollectible accounts as a percentage of total credit sales
b. Accounts receivable.
have risen from the 1.5% provided in the past years to 4%
c. Sales returns and allowances.
in the current year.
d. Sales revenue.
In response to your request for more information on the
deterioration of accounts receivable collections, the 5. An auditor selects a sample from the file of shipping
company’s controller has prepared the following report: documents to determine whether invoices were
prepared. This test is performed to satisfy the audit
Professional Company objective of
Accounts Receivable Collections a. Accuracy c. Control
December 31, 2020 b. Completeness d. Existence
The fact that some credit accounts will prove
uncollectible is normal, and annual bad debt write-
offs had been 1.5% of total credit sales for many PROBLEM NO. 2
years. However, during the year 2020, this
The accountant of Unjust Inc. presented to you the
percentage increased to 4%. The accounts
following details of its subsidiary ledger in relation to your
receivable balance is P1,500,000, and the condition
audit of the company’s accounts receivable balance as of
of this balance in terms of age and probability of
December 31,2020:
collection is shown below:
Customer Invoice Date Amount
Proportion Probability of
Cheap Inc. December 20 P 550,000
to total Age of accounts collection
64% 1 – 10 days 99.0% December 1 1,200,000
October 11 950,000
18% 11 – 30 days 97.5%
8% Past due 31 – 60 95.0% August 4 420,000
days
5% Past due 61 – 120 80.0% Cruddy Co. November 20 2,000,000
September 4 900,000
days
3% Past due 121 – 65.0% August 2 500,000
180 days
2% Past due over 180 20.0% Grubby Inc. December 10 1,750,000
October 4 600,000
days
July 5 500,000
At the beginning of the year, the Allowance for
Doubtful Accounts had a credit balance of P27,300. Paltry Corp. September 9 2,600,000
July 10 1,250,000
The company has provided for a monthly bad debt
expense accrual during the year based on the March 5 900,000
assumption that 4% of total credit sales will be
uncollectible. Total credit sales for the year 2020 Nasty co. December 1 (500,000)
amounted to P8,000,000, and write-offs of
uncollectible accounts during the year totaled Audit notes:
P292,500.
 The company’s term is n/60 days.
QUESTIONS:
 The company’s general ledger shows the following
Based on the foregoing, answer the following: balances as of December 31, 2020:
1. How much is the adjusted balance of the allowance for Accounts Receivable P13,650,000
doubtful accounts as of December 31, 2020? Allowance for doubtful accounts (950,000)
a. P104,400 c. P49,800
b. P 77,100 d. P27,300
 The credit balance of the receivable resulted from
Nasty Co.’s overpayment of its account. The same
shall be settled by a delivery of merchandise the
following period.
 You have discovered that Grubby Inc.’s payment of an  On January 1, 2020, Vigan Company sold a tract of
October 4 invoice amounting to P600,000 was posted land. The land, purchased 10 years ago, was carried
against Cruddy Co.’s account for an invoice dated on Vigan Company’s books at a value of P500,000.
December 4, for the same amount. Vigan received a noninterest-bearing note for
P880,000. The note is due on December 31, 2021.
 Discussions with the credit department manager There is no readily available market value for the land,
revealed the following appropriate credit policy: but the current market rate of interest for comparable
Accounts receivable Doubtful of collection notes is 10%.
Current 2%
1-60 days past due 5%  On January 1, 2020, Vigan Company finished
61-120 days past due 20% consultation services and accepted in exchange a
More than 120 days promissory note with a face value of P1,200,000, a
past due 50% due date of December 31, 2022, and a stated rate of
5%, with interest receivable at the end of each year.
QUESTIONS: The fair value of the services is not readily
determinable and the note is not readily marketable.
Based on the above and the result of your audit, answer Under the circumstances, the note is considered to
the following: have an appropriate imputed rate of interest of 10%.
6. How much is the unreconciled difference between the
 On January 1, 2020, Vigan Company sold equipment
control account and the subsidiary ledger?
with a carrying amount of P1,600,000 to X Company.
a. None c. P20,000
As payment, X gave Vigan Company a P2,400,000
b. P10,000 d. P30,000
note. The note bears an interest rate of 4% and is to
7. What is the correct accounts receivable balance as of be repaid in three annual installments of P800,000
December 31, 2020? (plus interest on the outstanding balance). The first
a. P14,120,000 c. P14,140,000 payment was received on December 31, 2020. The
b. P14,130,000 d. P14,150,000 market price of the equipment is not reliably
determinable. The prevailing rate of interest for notes
8. Assuming that there were no other entries affecting
of this type is 14%.
the allowance for bad debts, what is the correct bad
debt expense for 2020?
QUESTIONS:
a. P369,500 c. P387,500
b. P378,500 d. P396,500 Based on the above and the result of your audit, answer
the following: (Round off present value factors to four
9. What is correct amortized cost of the receivables as of
decimal places and final answers to nearest hundred)
December 31, 2020?
a. P12,291,500 c. P12,791,500 11. The consultation service fee revenue that should be
b. P12,773,500 d. P12,803,500 recognized in 2020 is
a. P1,050,800 c. P 901,600
10. Which of the following populations should the auditor
b. P1,095,800 d. P1,200,000
start from when testing for the completeness of
reported sales of a manufacturing company. 12. The gain on sale of equipment that should be
a. Sales receipts recognized in 2020 is
b. Sales invoices a. P331,600 c. P412,400
c. Sales orders b. P257,280 d. P800,000
d. Goods dispatch notes
13. The noncurrent notes receivable as of December 31,
2020 is
a. P2,605,706 c. P2,494,000
PROBLEM NO. 3
b. P1,825,800 d. P2,625,700
The Vigan Company included the following in its notes
14. The current portion of long-term notes receivable as of
receivable as of December 31, 2020:
December 31, 2020 is
Note receivable from sale of land P 880,000 a. P1,600,000 c. P1,468,200
Note receivable from consultation 1,200,000 b. P1,680,000 d. P 800,000
Note receivable from sale of equipment 1,600,000
15. The interest income to be recognized in 2020 is
In connection with your audit, you were able to gather the a. P464,000 c. P459,500
following transactions during 2020 and other information b. P435,800 d. P156,000
pertaining to the company’s notes receivable:

 - end of AP.2905 - 