2 AUDIT OF RECEIVABLES

AUDIT PROGRAM FOR RECEIVABLES

Audit Objectives
To determine that:
a. Receivables represent valid claims against customers and other parties and have been
properly recorded.
b. The related allowance for doubtful accounts, returns and allowances, and discounts are
reasonably adequate.
c. Receivables are properly described.
d. Disclosures with respect to the accounts are adequate.

Audit Procedures
1. Obtain a list of aged receivable balances from the subsidiary ledger, and:
a. Foot and cross-foot the list.
b. Check if the list reconciles with the general ledger control account.
c. Trace individual balances to the subsidiary ledger.
d. Test the accuracy of the aging.
e. Adjust non-trade accounts erroneously included in customers' accounts.
f. Investigate and reclassify significant credit balances.

2. Test accuracy of balances appearing in the subsidiary ledger.

3. Confirm accuracy of individual balances by direct communication with customers.

a. Investigate exceptions reported by customers and discuss with appropriate officer
for proper disposal
b. Send a second request for positive confirmation requests without any replies from
customers.
c. If the second request does not produce a reply from the customer, perform extended
procedures, like:
aa. Reviewing collections after year-end.
bb. Checking supporting documents.
cc. Discussing the account with appropriate officer.
d. Discuss with appropriate officer, confirmation requests returned by the post office and
and perform extended procedures
e. Prepare a summary of confirmation results.

4. Review correspondence with customers for possible adjustments.

5. Test propriety of cutoff:

a. Examine sales recorded and shipments made a week before and after the balance
sheet date and ascertain whether the sales were recorded in the proper period.
b. Investigate large amounts of sales returns shortly after the balance sheet date.
6. Perform analytical procedures, like:
a. Gross profit ratio.
b. Accounts receivable turnover.
c. Ratio of accounts written off to sales or balance of accounts receivable.
Compare with prior year and industry average.

7. Review individual balances and age of accounts with appropriate officer, and:
a. Determine accounts that should be written off.
b. Determine the adequacy of allowance for doubtful accounts.

8. Obtain analysis of significant other receivables.

9. Ascertain whether some receivables are pledged, factored, discounted, or assigned.

10. Determine financial statement presentation and adequacy of disclosures.

11. Obtain receivable representation letter from client.

 2 problems
Problem 2-1
Analyzing Various Receivable Transactions
The December 31, 2019, statement of financial position of the Terex Company included
the following information:

Accounts receivable $ 672,000

Less: Allowance for bad debts 42,300 $ 629,700
Notes receivable * 65,400
Total receivables $ 695,100

* The company is contingently liable for discounted notes receivable of $114,000.

During the year ending December 31, 2019, the following transactions occurred:

1. Sales on credit $ 2,623,800

2. Collection of accounts receivable 2,523,000
3. Accounts receivable written off as uncollectible 41,400
4. Notes receivable collected 87,000
5. Customer note received in payment of accounts receivable 216,000
6. Notes receivable discounted that were paid at maturity 108,000
7. Notes receivable discounted that were defaulted, including interest of $60
and a $15 fee. This amount is expected to be collected during 2020 6,075
8. Proceeds from customer notes discounted with recourse (principal $135,000
accrued interest, $600) 135,225
9. Collections on accounts previously written off 1,500
10. Sales returns and allowances (on credit sales) 6,000
11. Bad debts were estimated to be 1.5% of credit sales

Required:
Based on the preceding information, determine the balances of the following accounts
at December 31, 2020.
a. Accounts receivable
b. Allowance for doubtful accounts
c. Notes receivable
d. Notes receivable discounted

Problem 2-2
Computation of Accounts Receivable Balance

Shown below is Golden Egg Company's aging schedule of its accounts receivable on December 31,
2019:
Days Past Due
Balance
Customers Due Current 1-30 31-60 Over 60
Able Company $ 23,000 $ - $ - $ 23,000 $ -
Bubble, Company 105,000 62,000 20,000 13,000 10,000
Candy Corporation 87,500 23,000 14,500 10,000 40,000
Delta, Inc. 93,500 53,000 20,500 10,000 10,000
Eggnog Transport 40,000 0 0 0 40,000
Flower, Inc. 31,000 15,000 16,000 0 0
Glory, Company 1,000 1,000 0 0 0
Hillside Corporation 64,000 20,000 18,000 16,000 10,000
Idol Company 60,000 60,000 0 0 0
$ 505,000 $ 234,000 $ 89,000 $ 72,000 $ 110,000

The accounts receivable balance per general ledger is $505,000 on December 31, 2019.

The following are audit comments for possible adjustments:

Able Company
Merchandise found defective; returned by the customer on November 10 for credit, but the credit
memo was issued by Golden Egg Company only on January 2, 2020.

Bubble, Company
Account is good but usually pays late.

Candy Corporation
Merchandise worth of $40,000 destroyed in transit on June 4, 2019. The carrier was billed on July 1.
(see Eggnog Transport and Idol Company)

Delta, Inc.
Customer billed twice in error for $10,000. Balance is collectible.

Eggnog Transport
Collected in full on January 15, 2020.

Flower, Inc.
Paid in full on December 29, 2019, but not recorded. Collections were deposited January 3, 2020.

Glory, Company
Received account confirmation from customer for $11,000. Investigation revealed an erroneous
credit for $10,000. (see Hillside Corporation)

Hillside Corporation
Neglected to post $10,000 credit to customer's account.

Idol Company
Customer wants to know the reason for receipt of $40,000 credit memo as its accounts payable
balance is $100,000.

Required:
Based on the foregoing information, what should be the adjusted balance of the Accounts
Receivable-trade at December 31, 2019?

Problem 2-3
Bad Debts Reporting
Presented below are unrelated situations. Answer the questions relating to each situation.

A. Lambert Company's accounts receivable at December 31, 2019 had a balance of $1,200,000.
The allowance for bad debts account had a credit balance of $40,000. Net sales in 2019
were $6,704,000 (net of sales discounts of $56,000). An aging schedule shows that
$150,000 of the outstanding accounts receivable are doubtful.

Required:
What is the adjusting entry for estimated bad debts?

B. The following selected transactions occurred during the year ended December 31, 2019:

Gross sales (cash and credit) $ 750,000

Collections from credit customers, net of 2% cash discount 245,000
Cash sales 150,000
Uncollectible accounts written off 16,000
Credit memos issued to credit customers for sales return and
allowances 8,400
Cash refunds given to cash customers for sales returns and
allowances 12,640
Recoveries on accounts receivable written off in prior years (not
included in cash received stated above) 5,421

At year-end, the company provided for estimated bad debts losses by crediting
the Allowance for Bad Debts accounts for 2% of its net credit sales for the year.
Required:
1. What is the company's net credit sales in 2019?
2. What is the bad debt expense for 2019?

C. Cocoon Company estimates its bad debt expense to be 3% of net sales. The company's
unadjusted trial balance at December 31, 2019 included the following accounts:

Debit Credit
Allowance for bad debts $ 8,000
Sales $ 2,600,000
Sales returns and allowances $ 45,000
Required:
What is the company's bad debts expense for 2019?

D. Belfast Company estimates its uncollectible accounts to be 3% of the accounts receivable

balance. The following information was taken from the company's statement of financial
position at December 31, 2019.
Debit Credit
Net sales (including cash sales of $825,0000) 3,460,000
Allowance for bad debts 69,000
Accounts receivable 2,460,000
Required:
What is the bad debt expense to be reported for 2019?

Problem 2-4
Analysis of Accounts Receivable and Related Accounts
The following information is based on a first audit of Serenity Company. The client has not prepared
financial statements for 2017, 2018, 2019. During these years, no accounts have been written off as
uncollectible, and the rate of gross profit on sales has remained constant for each of the three years.

Prior to January 1, 2017, the client used the accrual method of accounting. From January 1, 2017 to
December 31, 2019, only cash receipts and disbursements records were maintained. When sales
on account were made, they were entered in the subsidiary accounts receivable ledger. No general
ledger postings have been made since December 31, 2016.

As a result of your examination, the correct data shown in the table below are available:

12/31/16 12/31/19
Accounts receivable balances:
Less than one year old $ 15,400 $ 28,200
One to two years 1,200 1,800
Two to three years old 800
Over three years old 2,200
Total accounts receivable $ 16,600 $ 33,000

Inventories $ 11,600 $ 18,800

Accounts payable for inventory purchased $ 5,000 $ 11,000

Cash received on accounts receivable in:

2017 2018 2019

Applied to:
Current year collections $ 148,800 $ 161,800 $ 208,800
Accounts of the prior year 13,400 15,000 16,800
Accounts of two years prior 600 400 2,000
Total $ 162,800 $ 177,200 $ 227,600

Cash sales $ 17,000 $ 26,000 $ 31,200

Cash disbursements for Inventory Purchased $ 125,000 $ 141,200 $ 173,800

Required:
1. What is the company's sales revenue for the three-year period?
2. What is the company's total sales revenue for 2018?
3. What is the aggregate amount of purchases for the three-year period?
4. What is the company's gross profit ratio in each of the three-year period?
5. What is the company's gross profit for each of the three-year period?

Problem 2-5
Assignment and Factoring of Accounts Receivable

Presented below are unrelated situations. Answer the questions relating to each situations:

A. On December 5, 2019, Bellarus Company sold its accounts receivable (net realizable value,
$260,000) for cash of $230,000. Ten percent of the proceeds was withheld by the factor to
allow for possible customer returns and other account adjustments. The related allowance for
bad debts is $40,000.
Required:
 1. What amount of loss on factoring should be recognized?
2. What is the entry to record the factoring of accounts receivable?

B. On April 1, 2019, Sonata Company assigned accounts receivable totaling $400,000 as a

collateral on a $300,000, 16% note from Island Bank. The assignment was done on a
non-notification basis. In addition to the interest on the note, the bank also receives a 2%
service fee, deducted in advance on the $300,000 value of the note.

Additional information is as follows:

a. Collections of assigned accounts in April totaled $191,100 net of a 2% sales discounts.
b. On May 1, Sonata Company paid the bank the amount owed for April collections plus
accrued interest on note to May 1.
c. The remaining accounts were collected by Sonata Company during May except for $2,000
accounts written off as worthless.
d. On June 1, Sonata Company paid the bank the remaining balance on the note plus
accrued interest.
Required:
Prepare the journal entries to record the above transactions on the books of Sonata
Company.

C. Romero Finance company purchases the accounts receivable of other companies on a

without recourse, notification basis. At the time the receivable is factored, 15% of the amount
factored is charged to the client as commission and recognized as revenue in Romero Finance
Company's books. Also 10% of the receivable factored is withheld by Romero Finance as
protection against sales returns or other adjustment. This amount is credited by Romero
Finance to the Client Retainer account. At the end of each month, payments are made by
Romero Finance to its clients so that the balance in the Client Retainer account is equal to
10% of the unpaid factored receivables. Based on the company's bad debt loss experience, an
allowance for bad debts of 5% of all factored receivables is to be established. Romero Finance
Company makes adjusting entries at the end of each month.

On January 3, 2019, Petrol Company factored its accounts receivable totaling $1,000,000.
By January 31, $800,000 on these receivables had been collected by Romero Finance.
Required:
Prepare the entries on Romero Finance Company's and Petrol Company's books to
record the above information.

Problem 2-6
Discounting of Notes Receivable

During your audit of Fable Company for the year ended December 31, 2019, you find the following
account:
Note Receivable
Date Debit Credit
Sept. 1. Corrie, 20%, due in 3 months $ 80,000
Oct. 1. Hazy Co., 24%, due in 2 months 300,000
Oct. 1. Discounted Corrie note at 25% $ 80,000
Nov. 1. Violet, 24%, due in 13 months 600,000
Nov. 30. Celtix Inc., no interest, due in one year 500,000
Nov. 30. Discounted Celtix note at 18% 500,000
Dec. 1. Tiktok, 18%, due in 5 months 900,000
Dec. 1. M. Reynolds, President, 12%, due in 3 months
(for cash loan given to M. Reynolds) 1,200,000
All notes are trade notes unless otherwise specified. The Corrie note was paid on December 1 as
per notification received from the bank. The Hazy Co. note was dishonored on the due date but
the legal department has assured management of its full collectability.

The company, with your concurrence, will treat the discounting as a conditional sale of note
receivable.

Required:
1. At what amount on the current assets section of the December 31, 2019, statement
of financial position will the Note Receivable-trade be carried?

2. What amount of loss/gain on notes receivable discounting should be reported in the 2019
income statement of the company?

3. Based on the ledger account presented, what amount of interest income should be
accrued at December 31, 2019?

Problem 2-7
Various Adjustments to Correct Accounts Receivable and Related Accounts

You are examining the financial statements of Simple Company for the year ended December 31,
2020. Your audit of the accounts receivable and other related accounts disclosed the following
information:

1. The December 31, 2020, balance in the Accounts Receivable control account is $788,000.

2. The only entries in the Bad Debts Expanse account were:

a. A credit for $1,296 on December 1, 2020, because customer A remitted in full for the
account charged off October 31, 2020.
b. A debit on December 31 for the amount of the credit to Allowance for Bad Debts.

3. The Allowance for Bad Debts account is presented below:

Date Particulars Debit Credit Balance

Jan. 1. Balance $ 15,250
Oct. 31. Uncollectible
Customer A $ 1,296
B 3,280
C 2,256 $ 6,032 9,218
Dec. 31. 3% of $788,000 $ 23,640 32,858

4. An aging schedule of the accounts receivable as of December 31, 2020, and the decision are
as shown in the table below:
Amount to which the allowance is to be
Net Debit adjusted after adjustments and correction
AGE Balance have been made

0 - 1 month $ 372,960 1%
1 - 3 months 307,280 2%
3 - 6 months 88,720 3%
Over 6 months 24,000 Definitely uncollectible is $4,000; $8,000
is considered to be 50% uncollectible;
remainder is estimated to be 80%
 collectible.
$ 792,960

5. There is a credit balance in one account receivable (0-1 month) of $8,000; it represents an
advance on sales contract; also there is a credit balance in one of the 1-3months accounts
receivable of $2,000 for which merchandise will be accepted by the customer.

6. The accounts Receivable control account is not in agreement with the subsidiary ledger. The
differences cannot be located, and the company's accountant decides to adjust the control
account to the sum of the subsidiaries after corrections are made.

Required:
1. The adjusting entry to correct the entry made on December 1, 2020.
2. What is the required allowance balance (per aging) on December 31, 2020?
3. What is the net realizable value of Simple Company's accounts receivable on December
31, 2020?
4. How much should simple Company report as bad debts expense for 2020?
5. What entry is necessary to adjust the allowance account at December 3, 2020?

Problem 2-8
Noninterest - bearing Note

On January 1, 2020, Wilder Company, sells its equipment with a carrying value of $160,000. The
company receives a non-interest-bearing note due in 3 years with a face amount of $200,000. There
is no established market value for the equipment. The prevailing interest rate for a note of this type
is 12%. The following are the present value factors of 1 at 12%:

Present value of 1 for 3 periods 0.71178

Present value of an ordinary annuity of 1 for 3 periods 2.40183

Required:
1. What is the gain or loss to be recognized on the sale of equipment?
2. What is the amount of the discount on note receivable on January 1, 2020?
3. What is the discount amortization at the end of the third year using effective interest
method?