ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4702

CPA Review Batch 47  May 2024 CPA Licensure Examination

FINANCIAL ACCOUNTING & REPORTING / AUDITING PRACTICE S. IRENEO  G. MACARIOLA  C. ESPENILLA  J. BINALUYO

RECEIVABLES
Nature of receivables
Receivables are financial assets arising from contractual rights to receive cash or another financial asset from
another company.

Types of receivables
Trade receivables arise from the sale of merchandise or service in the ordinary course of business. This
may be evidenced by a promise to pay called Notes Receivable, or not evidenced by a promise to pay,
Accounts Receivable

Non-trade receivable are claims arising from sources other than from sale of goods and services in the
normal course of business.

Nature of note receivable

A note receivable is evidenced by a written promise to pay. The note receivable may either be interest-bearing
or non-interest-bearing. A note receivable is said to be interest bearing if it has a nominal interest rate. A note
receivable that does not have a nominal interest rate is termed as a non-interest-bearing note.

Initial valuation
Accounts receivable is initially recognized when the entity becomes a party to the contractual provision of the
instrument and are initially valued at the transaction price, which is the amount an entity expects to be entitled
in exchange for the transfer of goods and services.

At the date of initial recognition notes receivable are valued at:

a. Face value if stated interest rate is equal to the prevailing market interest rate (effective interest rate or
yield rate) at initial recognition. Here the notes’ present value equals its face value.
b. Present value that is lower than the face value, if stated interest rate is lower than prevailing market
interest rate. A typical example of a note that is initially recorded at present value, which is lower than
the face value is a non-interest-bearing note. The difference between the present value and the face value
is recognized as a discount on note receivable which is amortized as interest income under the effective
interest method.
c. Present value that is higher than the face value, if stated interest rate is higher than the prevailing market
interest rate. The difference between the present value and the face value is recognized as a premium on
notes receivable which is amortized under the effective interest method.

Valuation at reporting date

Receivables are valued at amortized cost, which is the face value of the note plus the unamortized balance of the
Premium on Note Receivable or minus the unamortized balance of the Discount on Notes Receivable less any
allowance for estimated credit losses.

Presentation of receivables in the financial statements

Trade receivables are classified as current assets.

Non-trade receivables expected to be collected within 12 months from reporting date are classified as current;
while those expected to be collected beyond are classified as non-current.

Impairment of Loans and Receivables:

The impairment loss model under IFRS 9 provides for allowance for estimated credit losses (ECLs) by estimating
the probability of default by taking into account macro-economic factors. ECL is the probability-weighted estimate
of credit losses (i.e., the PV of all cash shortfalls) over the life of a financial instrument.

Lifetime ECL is the ECL that results from all possible default events over the expected life of a financial instrument.

12-month ECL is a portion of the lifetime ECL and represents the lifetime ECL resulting from a default occurring
in the 12 months after the reporting date weighted by the probability of that default occurring.

Stages in the Measurement and Recognition of Impairment

Stage 1 – Recognize the impairment loss in P/L thru an allowance account based on a 12-month ECL after
reporting period for receivables that are not credit impaired and with no significant increase in credit risk from
initial recognition
Stage 2 – Recognize in P/L, lifetime ECL for receivables that are not credit impaired but with significant increase
in credit risk. There is a rebuttable presumption that the credit risk has increased significantly since initial
recognition if contractual payments are more than 30 days past due.

Stage 3 – Assess individually the receivables to determine whether they are credit-impaired.

Receivable Financing
Pledging/General Assignment of Account receivable
1. Accounting for receivable is not affected, disclosure is required for the receivables pledged or assigned.
2. Recognize the proceeds of the borrowing as a liability
3. Charge interest on the carrying value of the liability
4. Any transaction cost incurred is a finance cost

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Specific Assignment of Account receivable

1. Reclassify the receivable as Receivable -Assigned
2. Recognized the proceeds of the borrowing as a liability and charge interests accordingly
3. Any transaction cost incurred is a finance cost
Factoring of Accounts receivable
1. Risks and Rewards of ownership transferred to the Buyer—treated as outright sale
2. Risks and Rewards of ownership not transferred to the Buyer – treated as borrowings
Discounting Notes Receivable
With Recourse— treated as a borrowing
Without Recourse – treated as a sale
Computation of Cash Proceeds of Notes Receivable Discounting
1. Compute for the maturity value of the note receivable = Principal + Total Interest Income
2. Compute for the discount = Maturity Value x Discount Rate x Discount Period
3. Compute for the proceeds = Maturity Value – Discount

FINANCIAL ACCOUNTING AND REPORTING - THEORIES

1. Which of the following should be recorded as Accounts Receivable?
a. Receivables from officers
b. Receivables from subsidiaries
c. Dividend receivable
d. Sale of goods to a customer on account
2. Which of the following transactions will decrease the recorded accounts receivable?
a. Sale of goods on account.
b. Collection of accounts previously written off.
c. Return of goods sold to a customer on account.
d. Cash discount availed using the net method.
3. Jed Company gets 2% of the total peso balance of accounts aged as 1-60 days past due and adds this to 5% of the
total peso balance of accounts aged 61-120 days past due. The total amount computed represents the
a. amount of uncollected accounts expense for the year.
b. amount that should be added to the allowance for uncollectible accounts at year-end.
c. amount of the desired credit balance of the allowance for uncollectible accounts to be reported in the year-
end financial statements.
d. Amount to be added to the total accounts written off during the year to arrive at the desired credit balance
of the allowance account.
4. When the allowance method of recognizing uncollectible account expense is used, the entries at the time of collection
of an account that was previously written off would
a. Increase profit.
b. Increase the amortized cost of accounts receivable.
c. Decrease profit.
d. Decrease the amortized cost of accounts receivable.
5. If Courage Co. will write-off the receivable from a bankrupt customer, and the balance of the allowance before this
write-off is greater than the amount to be written off, the effect of the write-off will
a. Have no effect on total current assets
b. Reduce net income for the period
c. Reduce total current assets
d. Reduce the amount of total equity
6. On July 1 of the current year, an entity received an interest bearing, one-year note receivable, the stated interest
of which is the same as the market interest rate. The face amount of the note receivable and the entire amount of
the interest are due on June 30 of next year. On December 31 of the current year, the entity should report in the
statement of financial position
a. A zero-interest receivable
b. A deferred credit for interest applicable to next year
c. Interest receivable for the interest accruing this year
d. Interest receivable for the entire amount of the interest due on June 30 of next year
7. The amortization of the discount on note receivable
a. Increases the amount of interest received to arrive at interest income.
b. Decreases the amount of interest received to arrive at interest income.
c. Decreases the carrying value of the note receivable.
d. Increases the face value of the note receivable.
8. How would the interest-bearing note collectible in installment basis be reported in the statement of financial position?
a. the entire carrying value is always reported as non-current asset.
b. the carrying value maybe reported as partly current and partly non-current.
c. the entire carrying value is always reported as current asset.
d. the carrying value is not reported in the statement of financial position.
9. Ding Inc. received a three-year, non-interest-bearing note for P50,000 on January 1, 2023. The current interest
rate at that time was 15% for similar notes. The only entry made in 2023 was:
Notes Receivable 50,000
Sales 50,000
The effects of the above entry on Ding’s profits for the years 2023, 2024 and 2025 and its retained earnings at the
end of 2025, respectively shall be
a. overstated, overstated, understated, no effect
b. overstated, understated, understated, understated
c. overstated, understated, understated, no effect
d. no effect on any of these

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10. Statement 1: When a note receivable is discounted on a with recourse basis where recourse obligation is
significant, the transaction is treated as a borrowing.
Statement 2: The amount of finance charge (interest expense) recognized on a discounting of notes receivable
is always equals to the amount of discount.
a. Only statement 1 is true
b. Only statement 2 is true
c. Both statements are true
d. Both statements are false
11. At initial recognition, which of the following is deducted from the face value of the receivable to arrive at its initial
fair market value?
a. direct origination costs.
b. direct origination fees.
c. discount on loan receivable.
d. premium on loan receivable.
12. Statement 1: The loan will have a new effective interest after effecting direct origination costs and fees.
Statement 2: The loan receivable shall be amortized using the original nominal interest.
a. only statement 1 is true
b. only statement 2 is true
c. both statements are true
d. both statements are false
13. Which of the following indicators should be present to shift the expected credit loss from stage 1 to stage 2?
a. an increase in credit risk
b. a significant increase in credit risk
c. an objective evidence of impairment
d. financial difficulties of the borrower
14. Where there is an objective evidence of impairment, the amount of interest income should be?
a. computed based on the gross carrying value of the loan.
b. computed based on the net carrying value of the loan.
c. no interest shall be recognized.
d. no correct answer.

FINANCIAL ACCOUNTING AND REPORTING & AUDITING PRACTICE - PROBLEMS

Problem 1: The following Receivables as of December 31, 2023 were taken from the books of Toga Co.:

Trade installment receivable due in 18 months, including unearned interest of P15,000 P725,000
Receivables from the officers due December 31, 2024 200,000
Claims against shipping company, due in 15 months 120,000
Past due trade accounts receivables 600,000
Customer’s NSF check returned by bank 80,000
Advances to employees 25,000
Receivable from customers arising from the sale of goods 750,000
Interest receivable on bonds 150,000
Interest receivable on notes 45,000
Other trade accounts receivable – unassigned 240,000
Subscriptions receivable for ordinary shares due in 24 months 1,000,000
Trade accounts receivable - assigned 550,000
Trade accounts on which post-dated check is held 290,000
Deposit made by a customer for the rent of the warehouse for 2 years 140,000
Trade accounts known to be worthless 30,000
*The company estimates that 5% of all outstanding trade receivables is doubtful of collection. The allowance for
bad debt balance at the beginning of the year was at P56,500 and during the year, P5,400 of previously written-
off account was recovered during the year.
Required:
1. How much is the amortized cost of the trade receivables to be reported on the December 31, 2023 SFP?
a. 2,200,000 b. 2,530,000 c. 3,220,000 d. 3,059,000
2. How much is Toga Co.’s bad debt expense in 2023?
a. 129,100 b. 125,000 c. 132,500 d. 134,500
3. What is the total trade and other receivables to be presented as current asset in the 2023 SFP?
a. 3,200,000 b. 3,530,000 c. 3,479,000 d. 3,640,000
Problem 2: On January 1, 2023, Orca Company’s accounts receivable has an outstanding balance of P500,000.
Below are the transactions for the current year:
Total Sales including cash sales of P500,000 P8,000,000
Account receivable written-off 60,000
Total Sales returns, of which P30,000 pertains to sales made on cash basis 80,000
Amount received from credit customers 5,100,000
Sales discounts taken advantage by customers (Co. uses Gross Method) 70,000
Amounts received representing recovery, not included in the P5,100,000 above 120,000
What is the amortized cost of the accounts receivable on December 31, 2023, assuming that the company’s policy
is to provide 5% allowance for bad debt based on the outstanding balance?
a. 2,470,000 b. 2,584,000 c. 2,973,500 d. 3,087,500

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PROBLEM 3: (AUDIT PRACTICE - GL AND SL RECONCILIATION AND AGING OF RECEIVABLES)

In line with your audit of Harry Corp.’s receivable balances as of December 31, 2023, the client’s
accountant provided you the following SL to GL reconciliation:

Balance per Subsidiary Ledger P3,890,000

a. Selling price of goods sold on consignment, goods delivered on December 5, 2023.
Consignee’s response to inquiry indicated that 40% of goods are still unsold. All sales were
made at 40% GP based on Sales. Commission rate as agreed upon is at 20% based on (140,000)
selling price (not yet recorded).
b. Charge for deliveries on December 29, goods still in-transit under FOB Shipping Point term 39,000
c. Charge for deliveries on December 30, goods still in-transit under FOB Destination term (18,000)
d. Charge for goods delivered on January 2, 2024 but is covered by a bill and hold
agreement with a customer, contract completed in December 2023 (20,000)
e. Subscriptions receivable from shareholders due March 2, 2024 80,000
f. Deposits on long-term contracts 500,000
g. Credit balance in customer accounts (44,000)
h. Credit memos for merchandise returns for invoice originally dated August 10 (12,000)
i. Portion of an October 10 outstanding invoice to a customer, expected to be returned by the (6,000)
customer.
j. Cash advances to an affiliated company 200,000
k. Write-off of a receivable from customer who recently declared bankruptcy. Outstanding
invoices were dated April 5 (P60,000), and July 20, 2023 (P75,000) (135,000)
Balance per General Ledger P4,334,000

The client’s accountant also provided you the following aging of accounts receivable, along with the
company’s policy of providing allowance for doubtful accounts:

Age Amount % Uncollectible

Current (60 days) P1,550,000 -
1-60 days past due 1,100,000 5%
61-120 days past due 740,000 10%
More than 120 days past due 500,000 20%

All sales were made under the terms 10/30, n/60. The company estimates based on past experience that 30%
of the accounts that are still current (60 days) will probably be paid within the discount period over the next
year, and another 2% of the accounts that are still current (60 days) is a fair estimate for customer returns.
The company has not recorded any bad debt expense for the year. During the year, however, it had a P23,500
recovery of a previously written-off account and a P135,000 write-off of uncollectible accounts (see
reconciliation above).
Requirements:
1. What is the correct balance of the accounts receivable – trade?
2. What is the carrying value/amortized cost of the accounts receivable–trade?
3. What is the correct bad debt expense for the year assuming that the allowance for doubtful
accounts had a balance of P105,700 as of January 1, 2023?

PROBLEM 4: (AUDIT PRACTICE - CONFIRMATION OF RECEIVABLES AND AGING OF RECEIVABLES)

You are assigned to audit Bonifacio Inc. for the year ended June 30, 2023. Prior to any adjustments, you were
able to extract the following balances from the client’s records:
Accounts receivable, control account P221,250
Allowance for doubtful accounts (7,500)
Amortized cost P213,750
Accounts receivable, subsidiary records:
60 days old and below P110,625
61 – 120 days 66,375
> 120 days 51,750
Credit balance (7,500)
Total P221,250
The credit balance in the accounts receivable represents collection from a customer whose account had been
written off as uncollectible in the previous year. Upon investigation, the only entry made by the client upon
the recovery was a debit to cash and a credit to accounts receivable.
Certain Accounts Receivable balances were circularized/confirmed as of June 30, 2023 and the
following exceptions/replies have not been disposed of as at the date of your examination.

Customer Balances Comments from Customers Audit Findings

Alpha P4,000 This balance for the invoice dated June Bonifacio Inc. received the mailed
5, 2023 was paid on June 29, 2023. check on July 2, 2023.
Beta 13,800 The balance for the invoice dated June Bonifacio Inc. erroneously credited
1 was offset by our June 10, shipment accounts payable for P13,800 to
of tires. record the purchase of tires.

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Charlie 16,600 The above balance for the invoice The payment was credited to
dated April 20 has been paid. customer Delta’s subsidiary records.
Delta 20,000 The records show a bigger balance, A new confirmation was mailed.
please check. All outstanding invoices to Delta are
dated June.
Echo 11,600 We do not owe Bonifacio Inc. anything The shipment costing P8,000 was
as the goods were received July, made on June 29, 2023 and the
2023, FOB Destination. goods were included in recording the
June 30, 2023 inventory summary.

Foxtrot 14,000 Our deposit of P18,000 should cover Bonifacio Inc. had previously
this balance credited the deposit to sales.
The P14,000 balance was for a June
shipment.
Juliet 6,000 Amount is okay. Since this is on Goods costing P4,400 were
consignment, we will remit payment appropriately included in Bonifacio
upon selling the goods. Inc.’s inventory. The amount is
included in the “below 60 days”
receivables.
Hotel 1,200 CM No. 8118 cancels this balance. The CM dated April 30, 2023 was
recorded by Bonifacio Inc. in July
2023. The amount is for an April
15 sales invoice.
India 22,400 No reply on the 2 sets of Upon your recommendation, the
confirmation letters sent. management agreed to write-off this
receivable. The amount is for an
invoice dated May 19, 2022.
Based on your discussions with the client, the following estimated rates are appropriate for computing the
uncollectible accounts:
60 days and below 2%
61 to 120 days 10%
More than 120 days 20%
Requirements:
1. What is the adjusted balance of accounts receivable?
2. What is the required allowance for bad debts as of June 30?
3. Assuming that there were no other entries affecting the allowance account during the fiscal year, how
much is the bad debt expense?

Problem 5: On January 1, 2023, Shoto Company sold its equipment with an original cost of P1,000,000 and an
accumulated depreciation of P400,000 and received a cash of P200,000 and a 4-year, 3%, P500,000 note to be
collected on December 31, 2026. Interest is to be collected at the end of each year. Effective interest on the note
on this date is 5%.
1. How much is the gain (loss) on sale of equipment?
a. (63,240) b. 52,460 c. 64,540 d. (135,460)
2. How much is the interest income for the period ended December 31, 2024?
a. 23,227 b. 23,638 c. 24,070 d. 24,524

Problem 6: Endeavor Inc. sold its building on March 31, 2022. The building has an estimated useful life of 5
years with an original cost of P15,000,000 and carrying value of P9,500,000 at the date of sale. Endeavor received
a P12,000,000, 3-year non-interest-bearing note to be collected in equal annual installment of P4,000,000 every
March 31 of each year starting 2023. There is no available fair value for the building but on March 31, 2022,
effective interest for similar note was at 6%. On December 31, 2023, effective interest increased to 7%.

1. How much is the interest income for the period ended December 31, 2023?
a. 641,522 b. 267,302 c. 440,014 d. 490,391
2. How much is the current portion of the note receivable as of December 31, 2023?
a. 3,559,986 b. 3,648,986 c. 3,889,996 d. 4,000,000

Problem 7: On January 1, 2023, Aizawa Company received a 10%, P14,000,000 note, collectible in installment
plus interest every December 31 of each year until December 31, 2027. The note is be collected as follows:
December 31, 2023 P4,000,000
December 31, 2024 3,500,000
December 31, 2025 3,000,000
December 31, 2026 2,500,000
December 31, 2027 1,000,000
The effective interest rates on January 1, 2023 and December 31, 2023 were 14% and 15%, respectively.
1. How much is the present value of the note when received on January 1, 2023?
a. 12,921,826 b. 12,098,192 c. 11,326,352 d. 10,226,392
2. How much is the carrying value of the note on December 31, 2023?
a. 13,330,882 b. 11,512,041 c. 9,330,882 d. 8,391,939

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3. How much of the carrying value of the note receivable is reported as non-current as of December 31, 2023?
a. 6,137,206 b. 3,346,414 c. 6,002,891 d. 3,129,324

PROBLEM 8: (AUDIT PRACTICE - LOANS RECEIVABLE –EXPECTED CREDIT LOSS RECOGNITION)

On January 1, 2023, Monoma Inc. extended a loan to Nieto Co. amounting to P1,000,000 and received a
three-year, 6% note. The note calls for annual interest to be paid each December 31, beginning 2023. The
company incurred origination costs amounting to ?. The company charged Nieto Co. P80,000 as origination
fees. As a result, the yield on the loan was at 8%. Based on the company’s initial estimates on initial recognition
date, the present value of the 12-months expected credit loss discounted at 8% is P100,000. The probability
of default is at 12%.
At the end of 2023, there was no evidence of significant increase in credit risk, the note is determined
to have a “low credit risk”, and there were no changes in the estimate of the 12-month expected credit loss.
On December 31, 2024, the interest for the period was collected. On this date, based on available forward-
looking information, there is evidence that there was a significant increase in credit risk, thus, the
entity had to change its basis of calculating loss allowance from a 12-month expected credit loss to a lifetime
expected credit loss. The PV of the lifetime expected credit loss discounted at 8% is at P400,000.
The probability of default is at 20%.
On Dec. 31, 2025, due to the financial crisis Nieto Co. is experiencing, the entity was not able to collect the
receivables at maturity date and that only P600,000 of the principal and interest due on December 31, 2025
will be collected. The amount is expected to be collected in two equal installments on December 31, 2026
and December 31, 2027. After reviewing all available evidence on December 31, 2025, it was determined
that the receivable is credit-impaired and that impairment loss should be recognized.
Required:
1. What is the amount of the origination cost on January 1, 2023 in relation to the loans receivable?
2. What is the initial carrying value of the loans receivable and how much is the bad expense/credit loss
that should be immediately recognized on January 1, 2023?
3. What is the carrying value of the loans receivable as of December 31, 2024 and the amount of the
bad debt expense/credit loss that should be recognized in 2024?
4. What is the impairment loss in 2025?
Problem 9: On October 31, 2023, Ingrid Corp. had the following transactions:
• Obtained a P500,000, 6-month loan from Citibank, discounted at 12%. The company pledged P600,000 of its
accounts receivable as a security for the loan.
• Factored P1,000,000 of accounts receivable without recourse on a notification basis with Nice Finance
Company. Nice Finance charged a factoring fee of 5% of the amount of the receivable factored and withheld
10% of the receivable factored.
What is amount of the cash received from the financing of the receivables and the amount of loss recognized
respectively?
a. 1,320,000; 50,000 b. 1,320,000; 150,000 c. 1,420,000; 50,000 d. 1,420,000; 150,000
Problem 10: Beryl Corp. received a P1M, 10%, 6-month note receivable for goods sold on February 1, 2023.
On May 31, 2023 the company discounted the note to BPI Bank at a 12% discount rate. The discounting was
made on a without recourse basis.

What is gain or loss on discounting to be recognized in the profit or loss for 2023?
a. 2,333 loss b. 2,333 gain c. 4,333 loss d. 4,333 gain

AUDITING PRACTICE - RAP, TOC AND ST

(Significant Business Process: Order to Cash)
1. Which of the following is not a significant process in the conventional revenue/receipt transaction cycle of a
company in the merchandising industry?
a. Order processing. c. Billing
b. Voucher preparation. d. Customer remittance acceptance.
2. While understanding the client revenue/receipt cycle, as part of his audit planning activities, the auditor learned
that the client has no system of approving customer orders in terms of the potential customer’s credit worthiness,
what will be a possible implication of this information in the auditor’s substantive test audit program?
a. Increase substantive test procedure focusing on existence of receivables.
b. Decrease extent of substantive test procedures focusing on valuation assertion on receivables.
c. Increase the number of customer accounts to be confirmed.
d. Obtain more persuasive evidence that focus on the valuation assertion on receivables.
3. What financial statement assertion would an auditor deemed affected by the possibility of delivery errors due
to the lack of appropriate internal control in the delivery of goods (e.g. delivery to the wrong customer, delivery
of erroneous goods etc.)
a. Completeness of Sales and AR c. Measurement of Sales and Valuation of AR
b. Occurrence of Sales and Existence of AR d. Completeness of Sales and Existence of AR
4. To achieve good internal control, which department should perform the activities of matching shipping
documents with sales orders and preparing daily sales summaries?
a. Billing c. Credit
b. Shipping d. Sales order

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5. Which of the following procedures most likely would not be an internal control designed to reduce the risk of
errors in the billing process?
a. Comparing control totals for shipping docs with corresponding totals for sales invoices.
b. Using computer programmed controls on the pricing & mathematical accuracy of sales invoices.
c. Matching shipping documents with approved sales orders before invoice preparation.
d. Reconciling the control totals for sales invoices with the AR subsidiary ledger.
6. While testing the effectiveness of internal control over the billing process, the auditor discovered that the
controls were not consistently observed as there were instances where sales entries based on sales invoices
were not supported by delivery receipts, what will be a possible implication of this TOC findings to the auditor’s
substantive test audit program?
a. Decrease substantive test procedure focusing on existence on receivables.
b. Increase extent of substantive test procedures focusing on valuation assertion on
receivables.
c. Increase the number of customer accounts to be confirmed.
d. Obtain more persuasive evidence that focus on the valuation assertion on receivables.
7. The auditor, upon examining controls over the billing process, observed that the pre-numbering of the delivery
receipts is not monitored as evident in the review by the auditor of the December sales journal entries and its
supporting documents (sales invoice, customer orders and delivery receipt). Which of the following may be a
valid conclusion as a result of this audit observation?
a. There may be unbilled deliveries which affect the completeness assertion of AR and Sales.
b. There may be fictitious deliveries which affect the exist./occur. assertion of AR and Sales.
c. There may be unbilled deliveries which affect the valuation assertion of AR and Sales.
d. There may be fictitious deliveries which affect the completeness assertion of AR and Sales.
8. Which of the following audit procedures would an auditor most likely perform to test controls relating to
management’s assertion concerning the completeness of sales transactions?
a. Verify that extensions and footings on the entity’s sales invoices and monthly customer
statements have been recomputed.
b. Inspect the entity’s reports of prenumbered shipping documents that have been recorded in
the sales journal.
c. Compare the invoice prices on prenumbered sales invoices to the authorized price list.
d. Inquire about the credit granting policies and the consistent application of credit checks.
9. A client suspects that certain subsidiary ledger postings of collections from customers were posted to wrong
customer subsidiary account balances, which of the following internal controls most likely lead to the detection
of such posting error?
a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
b. Each sales invoice is supported by a pre-numbered shipping document.
c. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
d. Sending of monthly statement of accounts to customers.
10. The most likely result of ineffective internal controls in the sales cycle is that
a. Fictitious transactions could be recorded, causing an understatement of revenues and an
overstatement of receivables.
b. Irregularities in recording transactions in the subs. accounts could delay the shipment of goods.
c. Omission of shipping documents could go undetected, causing an understatement of inventory.
d. Final authorization of credit memos by personnel in the sales department could permit an
employee defalcation scheme.
11. An auditor noted that the accounts receivable department is separate from other accounting activities. Credit is
approved by a separate credit department. Control accounts and subsidiary ledgers are balanced monthly.
Similarly, accounts are aged monthly. The accounts receivable manager writes off delinquent accounts after one
year or sooner, if a bankruptcy or other unusual circumstance is involved. Credit memoranda are pre-numbered
and must correlate with receiving reports. Which of the following areas could be viewed as an internal control
weakness of the above organization?
a. Write-offs of delinquent accounts c. Monthly aging of receivables.
b. Credit approvals d. Handling of credit memos.
12. Which of the following procedures concerning accounts receivable would an auditor most likely perform to
obtain evidential matter in support of an assessed level of control risk below the maximum level?
a. Observing an entity’s employee prepare the schedule of past due accounts receivable.
b. Sending confirmation requests to an entity’s principal customers to verify the existence of
accounts receivable.
c. Inspecting an entity’s analysis of accounts receivable for unusual balances.
d. Comparing an entity’s uncollectible accounts payable to actual uncollectible accounts.
13. In designing the audit program for Accounts Receivables and Sales, the auditor acknowledges that there is a
higher risk of _______, thus should design audit procedures that shall focus on validating ______ assertion/s?
a. Overstatement; Completeness and Existence/Occurrence
b. Understatement; Existence/Occurrence and Valuation
c. Understatement; Completeness and Valuation
d. Overstatement; Existence/Occurrence and Valuation
14. Sending accounts receivable confirmation letters to the client’s customers is consistent with the auditor’s
objective of validating client’s receivable assertion on:
a. Existence and rights c. Completeness and rights.
b. Completeness and valuation d. Existence and valuation.
c. Completeness and rights

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4702
RECEIVABLES

15. Which of the following is correct regarding the use of Accounts Receivable confirmation letter?
a. A positive confirmation request is necessary where audit risk assessment over receivables is low
and that the auditor expects little or no misstatement in receivables.
b. A negative confirmation request provides the more persuasive evidence regarding existence and
rights assertion over receivables.
c. A blank confirmation request is useful when an account balance is suspected to be overstated.
d. When a confirmation reply is received from the customer through the client, such a reply should
be considered invalid.
16. Which of the following statements about receivables confirmation is correct?
a. Under positive confirmation, the customer is request to confirm the accuracy of the balance stated
or state in what respect he disagrees.
b. The receivables’ confirmation has to take place immediately after the year-end.
c. Confirmation letters are sent by the auditor on the audit firm’s headed notepaper.
d. The confirmation provides assurance as to the valuation of receivable balances.
17. What actions should the auditor take if a reply to a positive confirmation request letter for a material amount
is not received from the customer within two or three weeks of being sent out?
a. Qualify the audit opinion due to lack of sufficient and appropriate evidence.
b. Send out a second request to the customer
c. Inform the entity’s internal audit department.
d. Qualify the audit opinion due to material misstatement in the financial statement.
18. As part of auditing the company’s revenue/receipt cycle, the auditor decided to render a sales cut- off by tracing
entries several days before and after the balance sheet date from the company’s sales journal to the source
documents which include the sales order, the sales invoice and the delivery receipt. Which of the following is
correct regarding the sales cut-off procedures?
a. Vouching entries several days before the balance sheet date to the source documents is necessary
to gather evidence regarding completeness assertion of receivables.
b. Vouching entries several days before and after the balance sheet date to the source documents
is necessary to gather evidence regarding valuation assertion of receivables.
c. Vouching entries several days before the balance sheet date to the source documents is necessary
to gather evidence regarding existence assertion of receivables.
d. Vouching entries several days after the balance sheet date to the source documents is necessary
to gather evidence regarding the existence assertion of receivables.
19. Cut-off tests designed to detect credit sales made after the end of the year that have been recorded in
the current year provide assurance about management’s assertion of:
a. Existence c. Valuation and allocation.
b. Rights and obligations d. Completeness
20. Tracing shipping documents to pre-numbered sales invoice provides evidence that , which
provides evidence about assertion over receivables.
a. No duplicate shipments or billings occurred; Existence.
b. Shipments to customers were properly invoiced; Completeness.
c. All goods ordered by customer were shipped.; Completeness.
d. All pre-numbered sales invoices were accounted for; Existence.
21. During an audit of the accounts receivable function, you found that the accounts receivable turnover rate had
fallen from 7 to 4 times over the last three years. What is the most likely cause of the decrease and which
financial statement assertion would this observation be relevant to in preparing the audit program for
substantive testing for receivables.
a. An increase in the discount offered for early payment; valuation.
b. A more liberal credit policy; valuation.
c. A change form net 30 to net 25; existence.
d. Greater cash sales; existence.
22. 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.
c. Inquiring about receivables pledged under loan agreements.
d. Assessing the allowance for uncollectible accounts for reasonableness.
23. The auditors’ analysis of the clients aged accounts receivable schedule is consistent with the auditor’s
objective of validating client’s receivable assertion on:
a. Existence c. Rights and obligation.
b. Completeness d. Valuation.

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