AP.2905 Receivables PDF

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AUDITING PROBLEMS OCAMPO/SOLIMAN/OCAMPOAP-Audit of Receivables OCTOBER 2020INTERNAL CONTROL MEASURES Proper internal control over receivables should observe the following: a. Sales must be separated from the accounting forthem. b. Accounting for sales must be separated from thereceipt of cash arisin...

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Since 1977

AUDITING PROBLEMS AP.2905-Audit of Receivables

OCAMPO/SOLIMAN/OCAMPO OCTOBER 2020

INTERNAL CONTROL MEASURES 1. Proper internal control over receivables should observe the following: a. Sales must be separated from the accounting for them. b. Accounting for sales must be separated from the receipt of cash arising from the receivables. c. Returns, allowances, discounts, and uncollectible charge-offs must be properly approved and separated from the cash receipts function. d. Periodically, receivables should be aged in order to determine the actions and efficiency of the credit department.

2. Notes receivable custodian should not have access to cash or to the accounting record. 3. A responsible official who does not have access to the notes should approve note renewals as well as chargeoffs of defaulted notes in writing. 4. Proper procedures should be adopted for the follow-up of defaulted notes.

SUBSTANTIVE AUDIT OF RECEIVABLES Sales and Accounts Receivable Balances

Sales Transactions

Existence or occurrence: Sales and accounts receivable are for shipments made to customers

Completeness: recorded

1. Confirm accounts receivable and perform procedures for confirmations not returned. 2. Perform analytical procedures to test sales and accounts receivable.

For a sample of shipping documents, trace sales invoice and entry into sales journal and accounts receivable subsidiary ledger. Perform cutoff tests.

Completeness: Sales transactions that occurred and existing receivables are recorded

Sales transactions that occurred are

Occurrence: Recorded sales are for shipments actually made to customers

3. Perform a test of sales cutoff.

For a sample of entries in the sales journal, compare sales invoice copy, customer order, and sales invoice.

Rights and obligations: Accounts receivable are owned by the client

Classification: Sales and accounts receivable transactions have been recorded in the proper accounts

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.

For a sample of entries in the sales journal, verify the accuracy of account coding.

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.

Accuracy (Valuation): recorded

Sales are correctly billed and

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.

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www.teamprtc.com.ph

AP.2905

PROBLEM NO. 1 The December 31, 2019 statement of financial position of Help Company included the following information: Notes receivable Less: NR discounted

P 598,000 (380,000)

Accounts receivable Less: Allow. for D.A. Total receivables

P2,240,000 ( 141,000)

P

218,000

2,099,000 P2,317,000

4. 5. 6. 7.

8.

9. 10. 11.

Sales on account Collections on accounts Accounts receivable written off as uncollectible Notes receivable collected Customer notes received in payment of accounts receivable Notes receivable discounted paid at maturity Notes receivable discounted defaulted, including interest of P200 and a P100 fee. This amount is expected to be collected in 2021 Proceeds from customer notes discounted (face value P450,000, accrued interest income, P2,000) Collections on accounts previously written off Sales returns and allowances Required allowance for doubtful accounts based on impairment assessment at year end

P 441,100 16,400 (15,000) P 442,500

The credit balance in customer’s account represents collection from a customer whose account had been written-off as uncollectible in 2019. Accounts receivable for more than a year totaling P21,000 should be written off.

The following transactions occurred during 2020: 1. 2. 3.

Accounts with debit balances Advances to officers Accounts with credit balance Accounts receivable per GL

P8,812,000 8,410,000 138,000 290,000

Confirmation replies received directly from customers disclosed the following exceptions: Customer Jessie

740,000 360,000

20,300

Customer’s Comments The goods sold on December 1 were returned on December 16, 2020.

Robert

We do not owe this amount *%#@ (bad word). We did not receive any merchandise from your company.

Investigation revealed that goods sold for P16,000 were shipped to Robert on December 29, 2020, terms FOB shipping point. The goods were lost in transit and the shipping company has acknowledged its responsibility for the loss of the merchandise.

Anne

I am entitled to a 10% employee discount. Your bill should be reduced by P1,200.

Anne is an employee of Praktis. Starting November 2020, all company employees were entitled to a special discount.

Jay-ar

We have not yet sold the goods. We will remit the proceeds as soon as the goods are sold.

Merchandise billed for P18,000 were consigned to Jay-ar on December 30, 2020. The goods cost P13,000.

Roy

We do not owe you P20,000. We already paid our accounts as evidenced by OR # 1234.

The sale of merchandise on December 18, 2020 was paid by Roy on January 6, 2021.

Roldan

Reduce your bill by P1,500

This amount represents freight paid by the customer for the merchandise shipped on December 17, 2020, terms, FOB destination-collect.

448,500 5,000 20,000

12,000

QUESTIONS: Based on the above and the result of your audit, answer the following: 1. The loss from discounting of notes receivable is a. P3,500 c. P1,500 b. P2,000 d. P 0 2. The adjusted balance of Accounts Receivable as of December 31, 2020 is a. P2,479,000 c. P1,729,000 b. P1,739,000 d. P1,744,000 3. The adjusted balance of Notes Receivable as of December 31, 2020 is c. P668,000 a. P238,000 b. P688,300 d. P688,000 4. The amount to be reported as trade and other receivables in the entity’s statement of financial position as of December 31, 2020 is a. P1,970,300 c. P1,965,300 b. P1,950,000 d. P1,945,000 5. When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion? a. Valuation c. Completeness b. Cutoff d. Classification

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:

Audit Findings The client failed to record credit memo no. 23 for P12,000. The merchandise was included in the ending inventory at cost.

REQUIRED:

December 31, 2020 is presented below:

1. Adjusting entries as of December 31, 2020. 2. Adjusted balance of Accounts Receivable December 31, 2020. P387,400

as

of Age 60 days & under 61 to 90 days 91 to 120 days Over 120 days

3. 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 b. Rights and obligations and existence c. Valuation and rights and obligations d. Existence and completeness 4.

The negative request form of accounts receivable confirmation may be used when the

a. b. c. d.

Combined Assessed Level Of Inherent and Control Risk Is Low Low High High

Percentage to be applied after corrections have been made

P387,800

1 percent

307,100

2 percent

89,800 53,200 P837,900



5 percent Definitely uncollectible, P9,000; the remainder is estimated to be 25% uncollectible.

The Allowance for Doubtful Accounts schedule is presented below: Debit

Number of Small Balances is Many Few Few Many

Consideration by the Recipient is Likely Unlikely Likely Likely

5. Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? a. Review the cash receipts journal for the month prior to year-end. b. Intensify the study of internal control concerning 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. 6. If management refuses to allow the auditor to send a confirmation request, the auditor shall: a. Inquire as to management’s reasons for the refusal, and seek audit evidence as to their validity and reasonableness. b. Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks of material misstatement, including the risk of fraud, and on the nature, timing and extent of other audit procedures. c. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence. d. All of these.

PROBLEM NO. 3 In connection with your examination of the financial statements of Ringo, Inc. for the year ended December 31, 2020, you were able to obtain certain information during your audit of the accounts receivable and related accounts. 

Net debit balance

The December 31, 2020 balance in the Accounts Receivable control account is P837,900.

January 1, 2020 November 30, 2020 December 31, 2020 (P837,900 x 5%)

Credit

Balance P19,700 13,600

P41,895

P55,495

P6,100



Entries made in the Doubtful Accounts Expense account were: 1. A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts. 2. A credit for P6,100 on November 30, 2020, and a debit to Allowance for Doubtful Accounts because of a bankruptcy. The related sales took place on October 1, 2020.



There is a credit balance in one account receivable (61 to 90 days) of P11,000; it represents an advance on a sales contract.

QUESTIONS: 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, 2020? c. P833,800 a. P837,900 b. P839,900 d. P822,800 2. How much is the adjusted balance Doubtful Accounts as of December a. P25,475 b. P25,780

of the Allowance for 31, 2020? c. P25,255 d. P41,895

3. How much is the Doubtful Accounts expense for the year 2020? a. P21,180 c. P41,985 d. P20,875 b. P20,655 4. How much is the net adjustment to the Doubtful Accounts expense account? a. P14,920 credit c. P20,875 credit b. P14,615 credit d. P15,140 debit 5. All of the following are examples of substantive tests to verify valuation of net accounts receivable except the a. Re-computation of the allowance for bad debts. 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 noncurrent 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

61 - 90 days

318,100

2%

6,362

91 - 120 days

83,700

5%

4,185

Over 120 days

44,200

25%

11,050

Total

833,800

25,475

Total Less COS Gross profit

2018 2019 2020 Total

Inventories

12/31/17

12/31/20

P61,600 4,800 P66,400

P112,800 7,200 3,200 8,800 P132,000

146,400

124,160

Accounts payable for inventory purchased Cash received on AR in: Applied to: Current year sales Accounts of the prior year Accounts of two year prior Total

20,000

44,000

2018

2019

2020

P595,200

P647,200

P835,200

53,600

60,000

67,200

2,400 P651,200

1,600 P708,800

8,000 P910,400

Cash sales

68,000

104,000

124,800

Cash disbursements for inventory purchased

750,000

728,400

581,600

146,880

165,120

214,560

526,560

2018 3,200

2019 7,200

2020 112,800

595,200 60,000 8,000 666,400

647,200 67,200 721,600

835,200 948,000

The balance sheet of Yoko Corporation reported the following long-term receivables as of December 31, 2019: Note receivable from sale of plant Note receivable from officer

P6,000,000 1,600,000

In connection with your audit, you were able to gather the following transactions during 2020 and other information pertaining to the company’s long-term receivables: a.

The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3 annual installments of P2,000,000 plus interest on the unpaid balance every April 1. The initial principal and interest payment was made on April 1, 2020.

b. The note receivable from officer is dated December 31, 2019, earns interest at 10% per annum, and is due on December 31, 2022. The 2020 interest was received on December 31, 2020. c.

The corporation sold a piece of equipment to Yes, Inc. on April 1, 2020, in exchange for an P800,000 noninterest bearing note due on April 1, 2022. The note had no ready market, and there was no established exchange price for the equipment. The prevailing interest rate for a note of this type at April 1, 2020, was 12%. The present value factor of 1 for two periods at 12% is 0.797.

d. A tract of land was sold by the corporation to No Co. on July 1, 2020, for P4,000,000 under an installment sale contract. No Co. signed a 4-year 11% note for P2,800,000 on July 1, 2020, in addition to the down payment of P1,200,000. The equal annual payments of principal and interest on the note will be P902,500 payable on July 1, 2021, 2022, 2023, and 2024. The land had an established cash price of P4,000,000, and its cost to the corporation was P3,000,000. The collection of the installments on this note is reasonably assured. QUESTIONS: Based on the above and the result of your audit, determine the following:

REQUIRED: Based on the above and the result of your audit, compute for the gross profit for the years ended December 31, 2018, 2019 and 2020.

1. Noncurrent receivables as of December 31, 2020 a. P9,037,600 c. P6,500,484 b. P7,037,600 d. P6,443,100 2. Current portion of December 31, 2020 a. P2,000,000 b. P2,902,500

SOLUTION GUIDE: 2018 Sales – Cash Sales - Credit

2,632,800

PROBLEM NO. 5

As a result of your examination, the correct data shown below are available: Accounts receivable balances: Less than one year old One to two years old Two to three years old Over three years old

1,072,800

2,106,240

Balance, 12/31/20 Add collections:

The following information is based on the first audit of Paul Company.

Prior to January 1, 2018, the client used the accrual method of accounting. From January 1, 2018 to December 31, 2020, 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, 2018.

825,600

Computation of Credit Sales

PROBLEM NO. 4

The client has not prepared financial statements for 2018, 2019, or 2020. 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.

734,400

2019

2020

Total

68,000

104,000

124,800

296,800

666,400

721,600

948,000

2,336,000

long-term

receivables

as

c. P2,594,500 d. P 0

3. Interest income for the year 2020 a. P 854,000 c. b. P1,091,384 d.

P 911,384 P1,008,000

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