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    AUDITING PROBS

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    501 views7 pages

    Audit of Receivables

    Uploaded by

    kellyshaye08
    AUDITING PROBS

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 7
    a ee TT AUDITING PROBLEMS AP.2105-Audit of Receivables SCANPO/CABARLES OCTOBER 2016 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. ¢. Returns, allowances, discounts, and uncollectible charge-offs must be properly approved and ‘separated from the cash receipts function. 4d. 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 ‘ash or to the accounting record. 3. Aresponsible official who does not have access to the notes should approve note renewals as well as charge- offs 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 Existence or occurrence: Sales and accounts receivable are for shipments made to customers 1. Confirm accounts receivable and perform procedures for confirmations not returned 2. Perform analytical procedures to test sales and accounts receivable. Completeness: Sales transactions that occurred and ‘existing receivables are recorded 3. Perform a test of sales cutoff. Rights and obiigations: Accounts recelvable 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. 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. Sales Transactions Completeness: Sales transactions that occurred are recorded For a sample of shipping documents, trace sales Invoice and entry into sales journal and accounts receivable Subsidiary ledger. Perform cutoff tests. Occurrence: Recorded sales are for shipments actually made to customers For a sample of entries in the sales journal, compare sales Invoice copy, customer order, and sales invoice. 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) 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. end - Page 1 of 7 AP.2105 PROBLEM NO. 1 ‘The December 31, 2015 statement of financial position of Help Company included the following information: Notes recelvable P 598,000 Less: NR discounted (380,000) P 218,000 Accounts receivable 2,240,000 Less: Allow. for D.A. 141,000) 2,099,000 Total receivables 2,317,000 ‘The following transactions occurred during 2016: 1. Sales on account 8,812,000 2. Collections on accounts 8,410,000 3, Accounts receivable written off as uncollectible 138,000 4, Notes receivable collected 290,000 5. Customer notes received in payment of aécounts receivable 740,000 6. Notes receivable discounted paid at ‘maturity 360,000 7. Notes receivable discounted defaulted, including interest of P200 and a P100 fee. This ‘amount is expected to be collected in 2017 20,300 8. Proceeds from customer notes discounted (Face value 450,000, accrued interest income, P2,000) 448,500 9. Collections on accounts previously written off 5,000 10. Sales returns and allowances 20,000 11. Required allowance for doubtful ‘accounts based on impairment assessment at year end 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 cc. P4,500 b. 2,000 bo 2. The adjusted balance of Accounts Receivable as of December 31, 2016 is a. 2,479,000 ¢. P1,729,000 b. P1,739,000 4. P1,744,000 3. The adjusted balance of Notes Receivable as of December 31, 2016 is ‘a. P238,000 c. P668,000 b. P688,300 4. 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, 2016 is a, P1,970,300 c. P1,965,300 b. 1,950,000 dd. P1,945,000 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, 2016, you determined that this account includes the followin Accounts with debit balances P 441,100 Advances to officers ~ rer ‘rade 16,400 ‘Accounts with credit balance (45.000), ‘Accounts receivable per GL B.ag2.500 ‘The credit balance in customer's account represents collection from a customer whose account had been written-off as uncollectible in 2015. Accounts receivable for more than a year totaling P21,000 should be written off. Confirmation replies received directly from customers disclosed the following exceptions: Customer's Customer Comments Audit Findings Jessie The goods sold on The client failed to December 1 were record credit memo returned ‘on no. 23 for P12,000. December 16,2016. The merchandise was included in the ending inventory at cost. Robert We do not owe this Investigation amount *%#@ (bad revealed that goods . word). We did not sold for P16,000 receive any were shipped to merchandise from Robert on December your company. 28, 2016, terms FOB shipping point. The We Re daatnogc goods —were “Tost in wee bee transit and the shipping company has acknowledged its responsibility for the lost ofthe merchandise, Anne 1 am entitled to a Anne is an employee 10% employee of Praktis. Starting discount. Your bill November 2016, all should be reduced company employees by P1,200, were entitled to a special discount. Jay-ar We have not yet sold Merchandise billed the goods. We will remit the proceeds for P18,000 were consigned to Jay-ar as soon asthe goods on December 30, are sold, 2016. The goods cost P13,000. We do not owe you The sale of 20,000. We merchandise on ‘i already paid our December 18, 2016 % accounts ‘as was paid by Roy on evidenced by OR # January 6, 2017. 1234. Pedro Reduce your bill by This amount 4,500 represents freight paid by the customer for the merchandise shipped on December 17, 2016, terms, FOB destination-collect. REQUIRED: a. Adjusting entries as of December 31, 2016. b. Adjusted balance of Accounts Receivable as of December 31, 2016. PROBLEM NO. 3 In connection with your examination of the financial statements of Ringo, Inc. for the year ended December 31, 2016, you were able to obtain certain information during your audit of the accounts receivable and related accounts. © The December 31, 2016 balance in the Accounts Receivable control accounts is P837,900. + An aging schedule of the accounts receivable as of December 31, 2016 is presented below: Percentage to be applied Net debit after corrections have Age —balance been made 60 days & under —_P387,800 1 percent 61t0 90, days 307,100 2 percent 91 to 120 days: 89,800 5 percent Over 120 Definitely uncollectible, days 53,200 P9,000; the remainder is ‘estimated to be 25% 837,900 uncollectible, heise dcepasey Sa pretet + The Allowance for presented below: Doubtful Accounts schedule is Debit Credit Balance January 1, 2016 19,700 November 30,2016 P6,100 13,600 December 31, 2016 (P837,900 x 5%) P41,895 P55,495 + 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, 2016, and a debit to Allowance for Doubtful Accounts because of @ bankruptcy. The related sales took place on October 1, 2016. - + There is a credit balance in one account receivable (61 to 90 days) of P11,000; it represents an advance on a sales contract. (Quesrions: 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, 20167 3. P837,900 2 P833,800 b. PB39,900 J. P822,800 2. How much Is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 20167 A PISATS .” 725,255 . P28,780 4. Pa1,395 3. How much fs the Doubtful Accounts expense for the year 2016? 2. P21,180 c. P41,985 B. P20,658 4. 20,875 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 ee ee aaa. SOLUTION GUIDE #2: Satesor | Balance | Rate | Allowance 60 days and under 1% 61 - 90 days De 91 - 120 days 3% Over 120 days 25% Totat_ 2 PROBLEM NO. 4 ‘The following information Is based on the first audit of Paul Company. The client has not prepared financial statements for 2014, 2015, or 2016. 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, 2014, the client used the accrual ‘method of accounting. From January 1, 2014 to December 31, 2036, 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, 2014, ‘As a result of your examination, the correct data shown below are available: 123143 12/31/16 Accounts receivable balances: Less than one year old, 61,600 112,800 ‘One to two years old 4,800 7,200 Two to three years old - 3,200 Over three years old = 8.800 56.400 £132,000 Inventories 146,400 124,160 Accounts payable for inventory purchased 20,000 44,000 Cash received on AR in: 2014 2018 2016 Applied to: Current year sales 595,200 *P647,200 ' PB35,200 Accounts of the prior year 53,600 60,000 “s 67,200 ‘Accounts of two yearprior 4 _2400 1,600 ‘+ _g,009 Total P651.200 708,800 210.400 Cash sales 68,000 104,000 124,800 Cash disbursements for inventory purchased 750,000 728,400 581,600 REQUIRED: Based on the above and the result of your audit, compute for the gross profit for the years ended December 31, 2014, 2015 and 2016. ea Rn nether aan nnn Toon Eee nnee ers ba " ’ BAA, EXCEL PROFESSIONAL SERVICES, INC. SOLUTION GUIDE: 3. Interest income for the year 2016 ~ * a 854,000 cP 911,384 en | B. P1oa1,384 4. P1,008,000 Seles=Credt_[ 4. Accrued interest receivable as of December 31, 2016 [Total = = a. P 360,000 . P514,000, ese i b. P57ii3e4 674,000 (Gross prof i i is —J sowuriow cuioe #182: Computation of Credit Sales ; — - a Non | Batonee, 13750776 we ~ mee sie _ surcent f TR-sale of plant: [ada calla fe | aera —— 2014 ~ Legs principal inst. due, 4/1/37 2016. a “| -oncer Toe = Ee _ PROBLEM NO. 5 ‘The balance sheet of Yoko Corporation reported the following long-term receivables as of December 31, 2015: 6,000,000 4,600,000 Note receivable from sale of plant Note receivable from officer In connection with your audit, you were able to gather the following transactions during 2016 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 's payable in 3 annual installments of P2,000,000 plus interest on the unpald balance every April 1. The initial principal and interest payment was made on April 1, 2016. b. The note receivable from officer Is dated December 31, 2015, ears interest at 10% per annum, and is due on December 31, 2018. The 2016 interest was received on December 31, 2016. c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2016, in exchange for an P800,000 non- interest bearing note due on April 1, 2018, 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, 2016, 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, 2046, for P4,000,000 under an installment ssale contract. No Co. signed 2 4-year 11% note for 2,800,000 on July 1, 2046, 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, 2017, 2018, 2019, and 2020. ‘The land had an established cash price of P4,000,000, and its cost to the corporation was 3,000,000. ' 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: 1. Noncurrent receivables as of December 31, 2016 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, 2016 a. P2,000,000 c. P2,594,500 ». p2902.500 dP 0 NR-sale of equipment: CA, 4/1/16 Discount amort. ‘NR-sale of land: A, 12/31/16 Less principal inst. due, 7/1/17 Total | Interest Total PROBLEM NO. 6 (On January 1, 2016, Pedro Company sold land that originally cost P400,000 to Buyer Company. As payment, Buyer gave Pedro Company @ P600,000 note. The note 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 December 31, 2016. The market price of the land is not reliably determinable, The prevailing rate of interest for notes of this type Is 14% on January 1, 2016 and 15% on December 31, 2016. v fete Pedro made the following journal entries in relation to the sale of land and the related note receivable: January 1, 2016 Notes receivable 600,000 Land 400,000 Gain on sale of land 200,000 December 31, 2016 cash 224,000 Notes receivable 200,000 Interest income 24,000 Pedro reported the notes receivable in its statement of financial position at December 31, 2016 as part of trade and other receivables. QUESTIONS: Based on the above and the result of your audit, answer the following: 1, The correct gain on sale of land is a. P103,105 & P120,061 b. P 94,868 4. P200,000 2, The correct interest income for 2016 is a. P74,230 c. P70,435 b. 72,809 d. 24,000 3. Profit for 2016 is overstated by a. P50,460 cc. P54,902 b. P31,130 dP 0 4, The correct carrying amount of the notes receivable at December 31, 2016 is 2. P400,000 c. P368,870 b. P345,098 d. 349,540 5. The entity's working capital at December 31, 2016 is overstated by a. P235,765, cc. P182,476 b. 232,936 a) SOLUTION GUIDE #: pate | P| 164%) | Totat | pvE@ Py, 14% | a6 s2/aii6 | 2oot [_24t | 22ar | 0.8772 [196,493 azsut7 | 200 | _ ter | 2iet | 0.7695 | 166,212 azyaij1s | 200r | _st | 20st | 0.6750 | 140,400 ‘600T 303,205 PROBLEM NO. 7 Select the best answer for each of the following: 1. In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate? 3. Equipment c. Bonds payable b. Bank charges d. Sales 2. ‘The purpose of tests of controls over shipping is to determine whether a. Billed goods have been shipped. b. Shipments are billed, . Shipping department personnel are competent. 4d. Credit is approved before goods are shipped. 3. The purpose of tests of controls over billing Is to determine whether a. Billed goods have been shipped. b. Shipments are billed. c._ Billing department personnel are competent. 4.” Credit is approved before goods are billed. 4, An auditor most likely would review an entity's perlodic ‘accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of ‘a. Existence or occurrence Valuation b. Rights and obligations: 4. Completeness 5. Which of the following might be detected by an auditor's review of the client’s sales cut-off? a. Excessive goods returned for credit b.. Unrecorded sales discounts ‘c. Lapping of year-end accounts receivable dd. Inflated sales for the year 6. An auditor who has confirmed accounts receivable may discover that the sales journal was held open past year-end if a. Positive confirmations sent to debtors are not returned b. Negative confirmations sent to debtors are not returned c Most of the returned negative confirmations indicate that the debtor owes a larger balance that the amount being confirmed. 7 10. itt ee A tiyetneeetrsieehsermmeseteesaenesnmecenereteenmanieniaaiansiattat d. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than the amount being confirmed. The auditor finds situation in which one person has the ability to collect receivables, make deposits, issue ‘credit memos and record receipt of payments, The ‘auditor suspects the individual may be stealing from cash receipts. Which of the following audit procedures would be most effective in discovering fraud in this scenario? a. Send positive confirmations to @ random selection of customers. b. Send negative confirmations to all outstanding accounts receivable customers. c. Perform a detailed review of debits to customer discounts, sales returns, or other debit accounts, excluding cash posted to the cash receipts journal. d. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the cash receipts journal. 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 accounts for current versus non- current status in the statement of financial position, — sssusipica ten c._Inspection of the aging schedule and credit records of past due accounts. d. Comparison of the allowance for bad debts with past records. 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 Valuation and rights and obligations d. Existence and completeness The negative request form of accounts receivable confirmation may be used when the Combined Assessed Level Of Inherent’ Number of Consideration and Control Small by the RiskIs Balancesis Recipient is Low Many Likely Low Few Unlikely High Few Likely High Many kely 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 4. Inspect the shipping records documenting the merchandise sold to the debtors. = now do the DIY drill - ee ian ES A DO-IT-YOURSELF (DIY) DRILL PROBLEM NO. 1 Professional Company produces paints and related products for sale to the construction industry throughout Metro Manila. While sales have remained reiatively stable Gespite a decline in the amount of new construction, there has been a noticeable change in the timeliness with which the company’s customers are paying their bills. ‘The company sells its products on payment terms of 2/10, 1n/30._In the past, over 75 percent of the credit customers have taken advantage of the discount by paying within 10 days of the invoice date. During the year ended December 31, 2016, the number of customers taking the full 30 days to pay has increased. Current indications are that less than 60% of the customers are now taking the discount. Uncollectible accounts as a percentage of total credit sales have risen from the 1.5% provided in the past years to 4% in the current year. In response to your request for more information on the

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