BUKSU AR104 RECEIVABLES / ENGAGEMENT PLANNING, OBTAINING AN

UNDERSTANDING OF THE CLIENT AND ASSESSING RISKS

Financial Statement Assertions

7. On the basis of the audit evidence gathered and
1. Which of the following is not a financial statement
evaluated, an auditor decides to increase the
assertion relating to account balances?
assessed level of control risk from that originally
a. Completeness. planned. To achieve an overall audit risk level that is
substantially the same as the planned audit risk level,
b. Existence. the auditor would
c. Rights and obligations. a. Decrease substantive testing.
b. Decrease detection risk.
d. Valuation and competence. c. Increase inherent risk.
d. Increase materiality levels.
8. Relationship between control risk and detection
Audit Risk risk is ordinarily
a. Parallel.
2. As the acceptable level of detection risk decreases, b. Inverse.
an auditor may c. Direct.
A. Reduce substantive testing by relying on the d. Equal.
assessments of inherent risk and control risk
B. Postpone the planned timing of substantive tests Materiality
from interim dates to the year-end 9. Which of the following would an auditor most
C. Eliminate the assessed level of inherent risk from likely use in determining the auditor’s preliminary
consideration as a planning factor judgment about materiality?
D. Lower the assessed level of control risk from the a. The anticipated sample size of the planned
maximum level to below the maximum substantive tests.
b. The entity’s annualized interim financial
3. The risk that an auditor will conclude, based on statements.
substantive tests, that a material misstatement does c. The results of the internal control questionnaire.
not exist in an account balance when, in fact, such d. The contents of the management representation
misstatement does exist is referred to as letter.
a. Sampling risk.
b. Detection risk. 10. Which of the following statements is not correct
c. Non-sampling risk. about materiality?
d. Inherent risk. a. The concept of materiality recognizes that some
matters are important for fair presentation of
4. As the acceptable level of detection risk decreases, financial statements in conformity with GAAP, while
the assurance directly provided from other matters are not important.
a. Substantive tests should increase. b. An auditor considers materiality for planning
b. Substantive tests should decrease. purposes in terms of the largest aggregate level of
c. Tests of controls should increase. misstatements that could be material to any one of
d. Tests of controls should decrease. the financial statements.
c. Materiality judgments are made in light of
5. Which of the following audit risk components may surrounding circumstances and necessarily involve
be assessed in non-quantitative terms? both quantitative and qualitative judgments.
Control risk Detection risk Inherent risk d. An auditor’s consideration of materiality is
a. Yes Yes No influenced by the auditor’s perception of the needs of
b. Yes No Yes a reasonable person who will rely on the financial
c. Yes Yes Yes statements.
d. No Yes Yes
11. Which of the following is a function of the risks of
6. Inherent risk and control risk differ from detection material misstatement and detection risk?
risk in that they a. Internal control.
a. Arise from the misapplication of auditing b. Corroborating evidence.
procedures. c. Quality control.
b. May be assessed in either quantitative or d. Audit risk.
Non-quantitative terms.
c. Exist independently of the financial statement 12. Which of the following is correct concerning
audit. performance materiality on an audit?
d. Can be changed at the auditor’s discretion. a. It will ordinarily be less than financial statement
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materiality. 18. Which of the following best describes what is

b. It should be established at beginning of an audit meant by the term “fraud risk factor?”
and not be revised thereafter. a. Factors whose presence indicates that the risk of
c. It should be established at separate amounts for fraud is high.
the various financial statements. b. Factors whose presence often have been observed
d. It need not be documented in the working papers. in circumstances where frauds have occurred.
c. Factors whose presence requires modification of
13. Which of the following would an auditor most planned audit procedures.
likely use in determining the auditor’s preliminary d. Material weaknesses identified during an audit.
judgment about materiality?
a. The results of the initial assessment of control risk. 19. Which of the following is correct concerning
b. The anticipated sample size for planned requirements about auditor communications about
substantive tests. fraud?
c. The entity’s financial statements of the prior year. a. Fraud that involves senior management should be
d. The assertions that are embodied in the financial reported directly to the audit committee regardless
statements. of the amount involved.
b. Fraud with a material effect on the financial
14. Holding other planning considerations equal, a statements should be reported directly by the auditor
decrease in the amount of misstatement in a class of to the Securities and Exchange Commission.
transactions that an auditor could tolerate most likely c. Fraud with a material effect on the financial
would cause the auditor to statements should ordinarily be disclosed by the
a. Apply the planned substantive tests prior to the auditor through use of an “emphasis of a matter”
balance sheet date. paragraph added to the audit report.
b. Perform the planned auditing procedures closer to d. The auditor has no responsibility to disclose fraud
the balance sheet date. outside the entity under any circumstances.
c. Increase the assessed level of control risk for 20. When performing a financial statement audit,
relevant financial statement assertions. auditors are required to explicitly assess the risk of
d. Decrease the extent of auditing procedures to be material misstatement due to
applied to the class of transactions. a. Errors.
b. Fraud.
15. When issuing an unmodified opinion, the auditor c. Illegal acts.
who evaluates the audit findings should be satisfied d. Business risk.
that the
a. Amount of known misstatement is documented in 21. Audits of financial statements are designed to
the management representation letter. obtain assurance of detecting misstatement due to
b. Estimate of the total likely misstatement is less Errors Fraudulent Misappropriation
than a material amount. financial reporting of assets
c. Amount of known misstatement is acknowledged a. Yes Yes Yes
and recorded by the client. b. Yes Yes No
d. Estimate of the total likely misstatement includes c. Yes No Yes
the adjusting entries already recorded by the client. d. No Yes No

Errors and Fraud 22. An auditor is unable to obtain absolute assurance

17. Which of the following is an example of that misstatements due to fraud will be detected for
fraudulent financial reporting? all of the following except
a. Company management changes inventory count a. Employee collusion.
tags and overstates ending inventory, while b. Falsified documentation.
understating cost of goods sold. c. Need to apply professional judgment in evaluating
b. The treasurer diverts customer payments to his fraud risk factors.
personal due, concealing his actions by debiting an d. Professional skepticism.
expense account, thus overstating expenses.
c. An employee steals inventory and the “shrinkage” 23. An attitude that includes a questioning mind and
is recorded in cost of goods sold. a critical assessment of audit evidence is referred to
d. An employee steals small tools from the company as
and neglects to return them; the cost is reported as a a. Due professional care.
miscellaneous operating expense. b. Professional skepticism.
c. Reasonable assurance.
d. Supervision.
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b. Mistakes in the application of accounting

24. Professional skepticism requires that an auditor principles.
assume that management is c. Mistakes in processing data.
a. Honest, in the absence of fraud risk factors. d. Unreasonable accounting estimates arising from
b. Dishonest until completion of audit tests. oversight.
c. Neither honest nor dishonest.
d. Offering reasonable assurance of honesty. 30. Which of the following characteristics most likely
would heighten an auditor’s concern about the risk of
25. The most difficult type of misstatement to detect intentional manipulation of financial statements?
is fraud based on a. Turnover of senior accounting personnel is low.
a. The over recording of transactions. b. Insiders recently purchased additional shares of
b. The non-recording of transactions. the entity’s stock.
c. Recorded transactions in subsidiaries. c. Management places substantial emphasis on
d. Related-party receivables. meeting earnings projections.
d. The rate of change in the entity’s industry is slow.
26. When considering fraud risk factors relating to
management’s characteristics, which of the following 31. Which of the following statements reflects an
is least likely to indicate a risk of possible auditor’s responsibility for detecting misstatements
misstatement due to fraud? due to errors and fraud?
a. Failure to correct known significant deficiency on a a. An auditor is responsible for detecting employee
timely basis. errors and simple fraud, but not for discovering
b. Non-financial management’s preoccupation with fraud involving employee collusion or management
the selection of accounting principles. override.
c. Significant portion of management’s compensation b. An auditor should plan the audit to detect
represented by bonuses based upon achieving misstatements due to errors and fraud that are
unduly aggressive operating results. caused by departures from GAAP.
d. Use of unusually conservative accounting c. An auditor is not responsible for detecting
practices. misstatements due to errors and fraud unless
the application of GAAS would result in such
27. Which of the following conditions identified detection.
during d. An auditor should design the audit to provide
fieldwork of an audit is most likely to affect the reasonable assurance of detecting misstatements
auditor’s assessment of the risk of misstatement due due to errors and fraud that are material to the
to fraud? financial statements.
a. Checks for significant amounts outstanding at
year-end. 32. What assurance does the auditor provide that
b. Computer generated documents. misstatements due to errors, fraud, and direct effect
c. Missing documents. illegal acts that are material to the financial
d. Year-end adjusting journal entries. statements will be detected?
Errors Fraud Direct effect
28. Which of the following is most likely to be a of illegal acts
response to the auditor’s assessment that the risk of a. Limited Negative Limited
material misstatement due to fraud for the existence b. Limited Limited Reasonable
of inventory is high? c. Reasonable Limited Limited
a. Observe test counts of inventory at certain d. Reasonable Reasonable Reasonable
locations on an unannounced basis.
b. Perform analytical procedures rather than taking 33. Because of the risk of material misstatement, an
test counts. audit of financial statements in accordance with
c. Request that inventories be counted prior to generally accepted auditing standards should be
year-end. planned and performed with an attitude of
d. Request that inventory counts at the various a. Objective judgment.
locations be counted on different dates so as to allow b. Independent integrity.
the same auditor to be present at every count. c. Professional skepticism.
d. Impartial conservatism.
29. Which of the following is most likely to be an
example of fraud? 34. Which of the following most accurately
a. Defalcations occurring due to invalid electronic summarizes what is meant by the term “material
approvals. misstatement?”
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a. Fraud and direct-effect illegal acts. c. The auditor is required to plan the audit to detect
b. Fraud involving senior management and material these conditions whenever they may result in
fraud. misstatements.
c. Material error, material fraud, and certain illegal d. The auditor is not required to plan the audit to
acts. discover these conditions, but should consider them
d. Material error and material illegal acts. if he or she becomes aware of them during the audit.

35. Which of the following statements best describes 36. When the auditor believes a misstatement is or
the auditor’s responsibility to detect conditions may be the result of fraud but that the effect of the
relating to financial stress of employees or adverse misstatement is not material to the financial
relationships between a company and its employees? statements, which of the following steps is required?
a. The auditor is required to plan the audit to detect a. Consider the implications for other aspects of the
these conditions on all audits. audit.
b. These conditions relate to fraudulent financial b. Resign from the audit.
reporting, and an auditor is required to plan the audit c. Commence a fraud examination.
to detect these conditions when the client is exposed d. Contact regulatory authorities.
to a risk of misappropriation of assets.

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1. Compute for the adjusted balance of Trade Receivables as of December 31, 2005.

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2. Compute for the Doubtful Accounts Expense for 2005.

3. Compute for the Net Realizable Value as of December 31, 2005.
In your audit of Plastic Products Co., you noted that the company’s balance sheet shows the
accounts receivable balance at December 31, 2005 as follows:
Accounts receivable P3,600,000
Allowance for doubtful accounts 72,000
P3,528,000
During 2006, transactions relating to the accounts were as follows:
Sales on account, P38,400,000.
Cash received from collection of current receivable totaled P31,360,000, after discount of P640,000
were allowed for prompt payment.
Customers’ accounts of P160,000 were ascertained to be worthless and were written off.
Bad accounts previously written off prior to 2005 amounting to P40,000 were recovered.
The company decided to provide P184,000 for doubtful accounts by journal entry at the end of the
year.
Accounts receivable of P5,600,000 have been pledged to a local bank on a loan of P3,200,000.
Collections of P1,200,000 were made on these receivables (not included in the collections previously
given) and applied as partial payment to the loan.

4. The accounts receivable as of December 31, 2006 is-

5. The allowance for doubtful accounts as of December 31, 2006 is-

6. The net realizable value of accounts receivable as of December 31, 2006 is-

In connection with your audit of the Salcedo Corporation, you noted that the company’s Notes
Receivable consists of the following:
a. A 4-month note dated November 30, 2006, from AA Company, P200,000; interest rate, 16%;
discounted on November 30, 2006 at 16%.
b. A draft drawn payable 30 days after for P900,000 by the BB Company on the Charlie Company in
favor of the Delta Company, endorsed to Salcedo Corp. on December 2, 2006 and accepted on
December 4, 2006.
c. A 90-day note dated November 1, 2006 from E. Dy, P500,000; interest at 16%; the note is for
subscription to 5,000 shares of the preferred stock of Salcedo Corp. at P100 per share.
d. A 60-day note dated May 3, 2006, from CC Company, P600,000; interest rate, 16%; dishonored at
maturity; judgment obtained on October 10, 2006. Collection within the next twelve months is
doubtful.
e. A 90-day note dated January 4, 2006, from Apol Bobads, president of Salcedo, P160,000; no
interest; note not renewed; president confirmed.
f. A 120-day note dated September 14, 2006, from DD Company, P120,000; interest rate, 16%; note
is held by bank as collateral.

7. The adjusted balance of Notes Receivable as of December 31, 2006 is-

8. How much of foregoing notes receivable will be reported in the current assets section of
the balance sheet?

9. How much is the net interest income from the foregoing notes receivable for 2006?

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10. The adjusted balance of Interest Receivable as of December 31, 2006 is

On January 1, 2004, Sinait Company loaned P3,000,000 to Ilocos Company. The terms of the loan
were payment in full on January 1, 2009, plus annual interest payments at 11%. The interest
payment was made as scheduled on January 1, 2005; however, due to financial setbacks, Ilocos
was unable to make its 2006 interest payment. Sinait considers the loan impaired and projects the
following cash flows from the loan as of December 31, 2006 and 2007. Assume that Sinait accrued
the interest at December 31, 2005, but did not continue to accrue interest due to the impairment of
the loan.
Amount projected as of
Date of Flow
Dec. 31, 2006 Dec. 31, 2007
December 31, 2007 P 200,000 P 200,000
December 31, 2008 400,000 600,000
December 31, 2009 800,000 1,200,000
December 31, 2010 1,200,000 1,000,000
December 31, 2011 400,000

11. Loan impairment (bad debt expense) for the year 2006

12. Interest income for 2007 assuming the P200,000 was collected on December 31, 2007 as
scheduled

13. Allowance for loan impairment as of December 31, 2007

14. Interest income for 2008 assuming the P600,000 was collected on December 31, 2008 as
scheduled

15. Carrying amount of loan receivable as of December 31, 2008

16. The negative form of accounts receivable confirmation request is particularly useful
except when
a. Individual account balances are relatively large.
b. Internal control surrounding accounts receivable is considered to be effective.
c. A large number of small balances are involved.
d. The auditor has reason to believe the persons receiving the request are likely to give them
consideration.

17. If receivables are hypothecated against borrowings, the amount of receivables involved
should be
a. Disclosed in the statements or notes
b. Excluded from the total receivables, with disclosure
c. Excluded from the total receivables, with no disclosure
d. Excluded from the total receivables and a gain or loss is recognized between the face value and
the amount of borrowings

18. Proper authorization procedures in the revenue/receipt cycle usually provide for approval
of write-offs by an employee in which of the following departments?
a. Accounts receivable c. Billing
b. Treasurer d. Sales
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19. To gather audit evidence about the proper credit approval of sales, the auditor would
select a sample of documents from the population represented by the
a. Subsidiary customers' accounts ledger.
b. Sales invoice file.
c. Customer order file.
d. Bill of lading file.

20. In determining validity of accounts receivable, which of the following would the auditor
consider most reliable?
a. Direct telephone communication between auditor and debtor.
b. Documentary evidence that supports the accounts receivable balance.
c. Confirmation replies received directly from customers.
d. Credits to accounts receivable from the cash receipts book after the close of business at year end.

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