PRE-DISCUSSION QUIZ:

AR/SALES, LOANS RECEIVABLE

BSA 222
1. Which of the following may be
considered to be a primary objective of
the auditor in the examination of accounts
receivable?
A.Determine approximate time of collectability of receivables.
B.Determine the relationship of receivables and sales
C.Determine the reasonableness of the sales figure
D.Establish validity and collectability of receivables.
2. Two assertions for which
confirmation of accounts receivable
balances provides primary evidence are
A. Completeness and valuation
B. Valuation and rights and obligations
C. Existence and completeness
D. Rights and obligations and existence
3. Which of the following procedures
would an auditor most likely rely on to
verify management’s assertion of
completeness?
A. Confirm a sample of recorded receivables by direct communication
with debtors.
B. Observe the client’s distribution of payroll checks.
C.  Compare a sample of shipping documents to related sales invoices.
D. Review standard bank confirmations for indications of kiting.
4. An auditor is testing sales transactions.
One step is to trace a sample of debit
entries from the accounts receivable
subsidiary ledger back to the supporting
sales invoices. What would the auditor
intend to establish in this step?
A. Sales invoices represent bona fide sales
B. Debit entries in the accounts receivable subsidiary ledger are
properly supported by sales invoices.
C. All sales invoices have been recorded.
D. All sales invoices have been properly posted to customer accounts.
5. You wish to substantiate the gross balance of
the account “Trade Notes Receivable” and
considers the advisability of performing four
procedures below. Which pair of procedures is
best suited to this objective?
I. Age the receivables
II. Confirm the notes with the makers
III. Inspect the notes
IV. Trace a sample of postings from the sales journal to the notes
receivable ledger.

A. I and III             B. II and III                   C. I and IV             D. II and IV

Your audit of Banana Corp. for the year ended December 31, 2021 revealed that the Accounts
Receivable account consists of the ff:
Trade accounts receivable P3,680,000
Past due trade accounts 640,000
Uncollectible accounts 128,000
Credit balances in customers’ accounts (80,000)
Consignment shipments – at cost
The consignee sold goods costing P96,000
for P160,000. A 10% commission was charged
by the consignee and remitted the balance to
Banana. The cash was received in January. 320,000
Total P 4,688,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000. It is
estimated that an allowance should be maintained to equal 5% of trade receivables, net of amount
due from the consignee who is bonded. The company has not provided yet for 2021 bad debt expense.

Based on your audit, determine the balance of 1) Accounts Receivable, 2) Allowance for doubtful
accounts, 3) Doubtful account expense
 AUDIT OF
RECEIVABLES AND SALES
BSA 222
Objectives
 Identify assertions to be addressed by audit
procedure for receivables, sales and related
accounts.
 Identify the audit objectives for receivables, sales
and related accounts.
 Describe the primary substantive audit procedures
for receivables, sales and related accounts.
Applicable Assertions
Classes of transactions/events Account balances Presentation and Disclosure

OCCURRENCE EXISTENCE OCCURRENCE/RIGHTS & OBLIGATIONS

COMPLETENESS RIGHTS AND OBLIGATIONS COMPLETENESS

ACCURACY COMPLETENESS CLASSIFICATION AND UNDERSTANDABILITY

CUTOFF VALUATION AND ALLOCATION ACCURACY AND VALUATION

CLASSIFICATION
AUDIT OBJECTIVES
Assertion Audit Objectives: To determine whether
Existence or occurrence All receivables reflected in the SFP are actual claims of the entity and all sales
have really occurred and pertain to the entity.
Completeness All of the actual claims of the entity for amounts yet to be received are included
in the SFP and all sales have been included in the SCI.
Cut-off Sales have been recorded in the correct accounting period.
Valuation and allocation Receivables are carried at their net realizable value.
Accuracy Sales have been accurately recorded in the SCI.
Rights and obligations The entity owns or has legal right to all the receivables reflected on the SFP at
the reporting date.
Presentation and Receivables and sales are properly classified, described and disclosed in the
disclosure financial statements, including in the notes.
AUDIT PROCEDURES
Assertion Procedures
C, V Reconcile the Subsidiary Ledger with General Ledger
E, O, V, A, R Confirm the receivables and review subsequent cash receipts.
O, A, Cl Test of details for occurrence, accuracy and classification of sales
E, O, R, V, A, C, P/D Analyze notes receivable and related interest
Evaluate the adequacy of the allowance for doubtful accounts, including appropriateness of methodology used to
V
calculate the allowance
E, O, R, C, C/O Perform accounts receivable and sales cutoff
C Test of details for completeness of sales
V Check the appropriate valuation of AR denominated in foreign currencies
V, P/D Investigate any transactions with related party receivables
P/D Analyze credit balances and unusual items
P/D Ascertain whether any receivables have been pledged or assigned.
C, E, V, P/D Perform analytical procedures.
Audit Procedure
Obtain aging schedule, reconcile S/L to G/L
You obtained the aging schedule of the accounts receivable of the auditee for December 31, 2022 with the following
data:
Days Past Due
Customers Balance Due Current
1-30 days 31-60 days Over 60
AA CO. P 23,000 P 0 P 0 P 23,000 P 0
BB, INC 105,000 62,000 20,000 13,000 10,000
CC CORP. 87,500 23,000 14,500 10,000 40,000
DD, INC 93,500 53,000 20,500 10,000 10,000
EE TRANSPORT 40,000 0 0 0 40,000
FF, INC 31,000 15,000 16,000 0 0
GG CO. 1,000 1,000 0 0 0
HH CORP 64,000 20,000 18,000 16,000 10,000
II COMPANY 60,000 60,000 0 0 0
TOTALS P 505,000 P 234,000 P 89,000 P 72,000 P 110,000

The accounts receivable balance per general ledger is P505,000 on December 31, 2022.
The following are audit comments for possible adjustments:
• AA Co. Merchandise found defective; returned by the customer on November 10 for credit, but the credit memo
was issued by the auditee only on January 2, 2023.
• BB, Inc. Account is good but usually pays late.
• CC Corp. Merchandise worth P40,000 destroyed in transit on June 4, 2022. The carrier was billed on July 1. (See EE
Transport and II Company)
• DD, Inc. Customer billed twice in error for P10,000. Balance is collectible.
• EE Transport. Collected in full on January 15, 2023.
• FF Inc. Paid in full on December 29, 2022, but not recorded. Collections were deposited January 3, 2023.
• GG Co. Received account confirmation from customer for P11,000. Investigation revealed an erroneous credit for
P10,000. (See HH Corp)
• HH Corp. Neglected to post P10,000 credit to customer’s account.
• II Company. Customer wants to know the reason for receipt of P40,000 credit memo as its account payable
balance is P100,000.

Required:
Based on the foregoing information, what should be the adjusted balance of the Accounts Receivable – trade at
December 31, 2022?
Audit Procedure
Perform sales cutoff test
Daffodil Auto Parts sells new parts to auto dealers. Company policy requires that a prenumbered
shipping document be issued for each sale. At the time of pickup or shipment, the shipping clerk
writes the date on the shipping document. The last shipment made in the year ended December
31, 2019, was recorded on document 3167. Shipments are billed in the order that the billing clerk
receives the shipping documents.
For late December 2019 and early January 2019, shipping documents are billed on sales invoices
as follows:
Shipping Document # Sales Invoice # Shipping Document # Sales Invoice #
3163 5332 3168 5328
3164 5326 3169 5329
3165 5327 3170 5333
3166 5330 3171 5335
3167 5331 3172 5334
The December 2019 and January 2020 sales journals have the following information included:
SALES JOURNAL – DECEMBER 2019
DAY OF MONTH SALES INVOICE # AMOUNT OF SALE

30 5326 P 72,611
30 5329 191,430
31 5327 41,983
31 5328 62,022
31 5330 4,774
SALES JOURNAL – JANUARY 2020
DAY OF MONTH SALES INVOICE # AMOUNT OF SALE

1 5332 P 264,131
1 5331 10,639
1 5333 85,206
2 5335 125,050
2 5334 64,658

What is the net overstatement (understatement) of Daffodil’s sales for the year ended, December 2019?
What adjusting entry is necessary to correct Daffodil’s financial statements?
Audit Procedure
Evaluate adequacy of AFDA
Yellow Bells estimates its bad debt losses by aging its Accounts Receivable. The aging schedule of AR at
December 31, 2018 is presented below:
Age of AR Amount Year A/R Balance 0-30 31-60 61-90 91-120 >120
0 – 30 days P 843,200 2017 P 1,312,500 0.3% 1.8% 12% 38% 65%
31 – 60 days 461,000 2016 999,999 0.5% 1.6% 11% 41% 70%
61 – 90 days 192,400 2015 465,000 0.2% 1.5% 9% 50% 69%
91 – 120 days 76,650 2014 816,000 0.4% 1.7% 10.2% 47% 81%
Over 120 days 39,400 2013 1,243,667 0.9% 2.0% 9.7% 33% 95%
Total P 1,612,650
The balance of the allowance for credit loss account at December 31, 2018 (before adjustment) is P84,500.
Required:
What is the average bad debt expense rate for “91-120 days” accounts?
What is the average bad debt expense rate for “31-60 days” accounts?
The net realizable value of the company’s AR on December 31, 2018 should be?
What entry should be made to adjust the allowance for bad debts on December 31, 2018?