CMPC 313 – AUDIT OF RECEIVABLES

INTERNAL CONTROL OF SALES TRANSACTIONS, ACCOUNTS RECEIVABLE AND NOTES

RECEIVABLE
When internal controls over sales on account are inadequate, the following situations may arise:

1. Merchandise may be shipped to customers whose credit standing has not been approved.
2. Shipments may be made to customers without notice being given to the billing department; consequently, no
sales invoice is prepared.
3. Sales invoices may contain errors in prices and quantities.
4. If sales invoices are not controlled by serial numbers, some may be lost and never recorded as accounts
receivable.

Internal controls are strengthened by the following control measures:

1. The following functions should be segregated from each other: credit and collection; cashier; accounting and
sales.
2. Subsidiary ledgers should be balanced regularly with the controlling accounts.
3. Monthly statements should be sent to all customers so that errors may be reported by the debtors.
4. Receivables should be confirmed periodically by the internal auditing department.
5. There should be sufficient control over the granting of credit and their collection
6. Accounts should be aged periodically.
7. Bad debt write off should be approved in writing by a responsible independent official.
8. The acceptance, renewal or write off of notes should be authorized by an independent, responsible official.

AUDIT WORKING PAPERS

1. Lead schedule
2. Aged trial balance of accounts receivable
3. Analysis of notes receivable and related interest
4. Summary of results of confirmation of receivable
5. Analysis of allowance for bad debts

AUDIT PROCEDURES FOR RECEIVABLES

Existence or Occurrence/Rights and Obligations

• Obtain schedule of aged trade accounts receivable and notes receivable schedule and reconcile to ledgers.
• Confirm receivables with debtors
• Inspect notes on hand.
• Perform analytical procedures to determine reasonability of recorded sales and receivables.

Completeness

• Test cut-off of sales and sales returns to determine whether receivables are recorded in the proper accounting
period.

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CMPC 313 – AUDIT OF RECEIVABLES

Valuation

• Review collectability of receivables and determine the adequacy of allowance for doubtful accounts
• Recalculate the interest income from notes receivable.

Presentation and Disclosure

• Evaluate financial statement presentation and disclosure of receivables

• Obtain written client representations regarding pledge, discount or assignment of receivables.

MULTIPLE CHOICE- THEORY

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 to sales
c. Determine the reasonableness of sales figure
d. Establish validity and collectability of receivables
2. Which of the following is not a procedure used by an auditor in examination of accounts receivable?
a. Confirmation
b. Reconciliation
c. Inquiry
d. Physical count and inspection
3. 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. Confirmation replies received directly from customers
c. Credits to accounts receivable from cash receipts books after the close of the business year
d. Documentary evidence that supports the accounts receivable balance
4. Which of the following forms of evidence represents the most competent evidence that a receivable actually
exists?
a. A positive confirmation
b. A sales invoice
c. A receiving report
d. A bill of lading
5. 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 by
this step>
a. Sales invoices represent bona fide sales
b. Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoice
c. All sales invoices have been recorded
d. All invoices have been properly posted to customer accounts
6. Tracing bills of lading to sales invoices provides evidence that
a. Shipments to customers were recorded as sales
b. Shipments to customers were invoiced
c. Recorded sales were shipped
d. Invoiced sales were shipped
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CMPC 313 – AUDIT OF RECEIVABLES

7. When the objective of the auditor is to evaluate the appropriateness of adjustments to sales, the best available
evidence would normally be
a. Documentary evidence obtained by inspecting documents supporting entries to adjustment accounts
b. Oral evidence obtained by discussing adjustment-related procedures with controller personnel
c. Analytical evidence obtained by comparing sales adjustments to gross sales for a period of time
d. Physical evidence obtained by inspection of goods returned for credit
8. An auditor most likely would review an entity’s periodic accounting for numerical sequence of shipping
documents and invoices to support management’s financial statement assertion of
a. Valuation
b. Completeness
c. Existence and occurrence
d. Rights and obligation
9. When the allowance method of recognizing bad debt expense is used, the entry to record the write-off of a
specific uncollectible account would decrease
A. Working capital
B. Net realizable value of accounts receivable
C. Net income
D. Allowance for bad debt
10. On July 1, 2022, a company received a one-year note receivable bearing interest at the market rate. The face
amount of the note receivable and entire amount of the interest are due on June 30, 2023. The interest
receivable account would show a balance on
A. July 1, 2022 but not on December 31, 2022
B. July 1, 2022 and December 31, 2022
C. December 31, 2022 but not on July 1, 2023
D. Neither July 1, 2022 nor on December 31, 2022
11. The balance of accounts receivable is reduced in recording all of the following financing arrangements except
A. Assignment of specific accounts receivable
B. Pledging of accounts receivable
C. Sale of accounts receivable
D. Accounts receivable factoring
12. An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is
to obtain evidence concerning management’ assertion about
A. Presentation and Disclosure
B. Existence or Occurrence
C. Rights and obligations
D. Valuation or allocation
13. Positive accounts receivable confirmations are appropriate when
A. Confirmations are mailed during an interim period
B. Accounts receivable consists of many small balances.
C. Control risk is low
D. There is reason to believe that a substantial number of accounts may be in dispute
14. Which of the following might be detected by sales cut-off tests?
A. Kiting
B. Understated inventory
C. Overstated receivables
D. Overstated sales
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CMPC 313 – AUDIT OF RECEIVABLES

PROBLEM SOLVING

PROBLEM 1. Classification
An entity provided you the following information as of December 31, 2021:

no Item Amount
1 Trade accounts receivable, net of P160,000 credit balance in customer accounts, P960,000
including P12,000 uncollectible customer accounts
2 Credit card sale of merchandise to a customer 1,000,000
3 Trade accounts receivable- assigned 1,800,000
4 Trade accounts receivable-unassigned 1,200,000
5 Trade accounts receivable-factored 1,200,000
6 8% notes receivable-trade 800,000
7 Accounts payable, net of P120,000 debit balance in supplier’s accounts 520,000
8 Special deposits on contract bids 440,000
9 Dividend receivables 60,000
10 Advances to officers (of which P240,000 is currently collectible) 1,200,000
11 Advances to affiliates 2,400,000
12 Subscription receivable (of which P75,000 is collectible within 90 days) 300,000
13 Accrued interest receivable 150,000
Based on the data, Determine the following:
1. Trade receivable
2. Trade and other receivables
3. Total items classified as noncurrent assets

Problem 2. Accounts Receivable Balance

The following T-account summarized the transactions affecting the accounts receivables of ABC company for 2022:

Purchase of merchandise P9,000,000

Inventory, June 30, 2022 1,500,000
Goods were sold at 50% above cost; 75% of sales were on account
Estimated bad debts 1% of credit sales
Collections from charge customers 6,300,000
Allowance for doubtful accounts, June 30, after write-off of 78,075
uncollectible accounts

The outstanding accounts receivable on June 30, 2022 is

A. P2,200,000 B. P2,137,500 C. P2,131,200 D. not given

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CMPC 313 – AUDIT OF RECEIVABLES

Problem 3. Test for Proper Sales Cut-off

You are engaged to perform an audit of the accounts of the Butterfly Corporation for the year ended December 31,
2022, and have observed the taking of the physical inventory of the company on December 30, 2022. Only merchandise
shipped by Butterfly to customers up to and including December 30, 2022 have been eliminated from inventory.

The inventory as determined by physical inventory count has been recorded on the books by the company’s controller.
No perpetual inventory records are maintained. All sales are made on an FOB Shipping point basis. You are to assume
that all purchase invoices have been correctly recorded.

The following lists of sales invoices are entered in the sales books for the months of December 2022 and January 2023,
respectively.

Sales Inv. Sales Inv. Date Cost of Mdse. Date Shipped

Amount Sold
December 2022
(a) P30,000 Dec. 21 P20,000 Dec 31
(b) 20,000 Dec. 31 8,000 Nov. 3
(c) 10,000 Dec. 29 6,000 Dec. 30
(d) 40,000 Dec. 31 24,000 Jan. 3
(e) 100,000 Dec. 30 56,000 Dec. 29 ( shipped to
consignee)
January 2023
(f) 60,000 Dec 31 40,000 Dec. 30
(g) 40,000 Jan. 2 23,000 Jan. 2
(h) 80,000 Jan. 3 55,000 Dec. 31

Requirement: Prepare the necessary adjusting journal entries at December 31, 2022.

Problem 4: Analysis of Accounts receivable and related accounts

Bataan Corporation’s general ledger showed the following information:

Accounts Receivable P550,000 (debit)

Allowance for Doubtful Accounts 16,500 (debit)

On the other hand, the accounts receivable subsidiary ledger shows the following composition:

Invoice Date Invoice Amount Balance

Customer A 12/06 P42,000
11/29 63,540 P105,540

Customer B 9/27 36,000

8/20 26,760 62,760

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CMPC 313 – AUDIT OF RECEIVABLES

Customer C 12/30 20,000

12/08 40,000
10/25 31,800 91,800

Customer D 11/17 69,420

10/09 66,000 135,420

Customer E 12/12 57,600

8/20 37,200 94,800

Customer F 9/12 52,200 52,200

Audit notes:

a. Accounts receivable confirmation letters were sent to the customers. You have noted the following:

Customer Balance per reply Remarks

Customer B P36,000 Invoice dated 8/20 was already settled. Investigation

revealed that Customer B’s payment was erroneously
posted against Customer E’s account for an invoice
dated 12/20 for the same amount.

Customer C 71,800 The difference was due to the invoice dated 12/30.
Goods have not yet been received by Customer C as
of December 31. Terms of sale is FOB Destination.

Customer E 121,560 “Amount per our records appear to be higher, so

please check”.
Customer F No reply Customer F is under liquidation and the amount
receivable from the company is deemed definitely uncollectible.

b. The company’s policy with regard uncollectible accounts is summarized below:

Age Collectibility %
30 days and below 99%
31-60 days 98%
61-90 days 95%
91-120 days 90%
Over 120 days 50%

c. In the event that the Accounts Receivable general ledger does not reconcile with the subsidiary ledger after
corrections are made and the difference cannot be located, you have come into an agreement with the client to
adjust the control to the sum of the subsidiaries as miscellaneous income or expense.
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CMPC 313 – AUDIT OF RECEIVABLES

Requirements:

1. The erroneous posting of Customer B’s payment to Customer E’s account resulted to total accounts receivable
being
a. Properly stated
b. Overstated P26,760
c. Understated by P26,760
d. Understated by P53,520

2. The correct bad debt expense for the year is

a. P67,113
b. P70,383
c. P100,113
d. P103,393

3. The journal entry to reconcile the balances of the Accounts Receivable general and subsidiary ledger after
corrections, if any, will include a
a. Debit to Sales
b. Credit to Accounts Receivable
c. Credit to Miscellaneous Income
d. No journal entry required

4. What is the audited balance of the Accounts Receivable account as of December 31?
a. P438,907
b. P443,560
c. P458,707
d. P470,320

5. What is the correct Allowance for Doubtful Accounts balance as of December 31?
a. P31,413
b. P31,613
c. P44,525
d. P44,725

6. What is the audited net realizable value of the Accounts Receivable as of December 31?
a. P 438,907
b. P 441,947
c. P 458,707
d. P 470,320

Problem 5. Receivable Financing

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CMPC 313 – AUDIT OF RECEIVABLES

During the second year of operations, Rabbit Company found itself in financial difficulties. The entity decided to use the
accounts receivable as a means of obtaining cash to continue operation.

On July 1, 2022, the entity sold P1,500,000 of accounts receivable for cash proceeds of P1,400,000. No allowance for
doubtful accounts was associated with these accounts.

On December 15, 2022, the entity assigned the remainder of its accounts receivable, P5,000,000 as of that date, as
collateral on a P2,500,000, 12% annual interest rate loan from Finance Company. The entity received P2,500,000 less a
2% finance charge.

None of the assigned accounts have been collected by the end of the year. It is estimated that 10% of accounts
receivable would be uncollectible.

The entity revealed the following data on December 31, 2022.

Accounts Receivable, excluding factored and assigned 1,000,000

accounts
Accounts receivable -assigned 5,000,000
Accounts receivable – factored 1,500,000
Allowance for doubtful accounts before adjustment 100,000

1. What total amount was received from the financing of accounts receivable?
A. 3,900,000 B. 3,850,000 C. 3,950,000 D. 4,000,000

2. What amount should be reported as net realizable value of accounts receivable on December 31, 2022?
A. 4,500,000 B. 5,400,000 C. 6,000,000 D. 5,000,000

3. What amount should be recognized as doubtful accounts expense for 2022?

A. 600,000 B. 500,000 C. 650,000 D. 0

Problem 6. Notes Receivable

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

A. On January 1, 2022, Cat Corporation sold goods to Rat Company. Rat Company signed a non-interest-bearing
note requiring payment of P600,000 annually for seven years. The first payment was made on January 1, 2022.
The prevailing rate of interest for this type of note at date of issuance was 10%.
PV of an ordinary annuity of 1 at 10% for 6 periods 4.36
PV of an ordinary annuity of 1 at 10% for 7 periods 4.87

1. What is the amount of Sales Revenue credited on January 1, 2022?

2. What is the carrying amount of note receivable on December 31, 2022?

B. On January 1, 2022, Parrot Company sold equipment with a carrying amount of P4,800,000 in exchange for a
P6,000,000 noninterest-bearing note due January 1, 2025. There was no established exchange price for the
equipment. The prevailing rate of interest for a similar note was 10% and the present value of 1 at 10% for
three periods is 0.75.

1. How much is the Loss on Sale of equipment on January 1, 2022?

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CMPC 313 – AUDIT OF RECEIVABLES

2. What is the interest income on December 31, 2023?

C. 120- day note of P100,000 dated October 1, non-interest bearing, and with a market rate of 9% interest,
discounted at the bank on November 30 at 12%. This note was received from the sale of the equipment.

Determine the proceeds from discounting of notes receivable.

Problem 7:

The balance sheet of COMPETENCE Corporation reported the following long-term receivables as of December 31, 2020:

Notes receivable from sale of Plant 9,000,000

Notes receivable from officer 2,400,000

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 three equal annual
installments of P3,000,000 plus interest on the unpaid balance every April 1. The initial principal and interest
payment was made on April 1, 2021.

b. The note receivable from officer is dated December 31, 2020, earns interest at 10% per annum, and is due on
December 31, 2023. The 2021 interest was received on December 31, 2021.

c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2021, in exchange for a P1,200,000 noninterest
bearing note due on April 1, 2023. 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, 2021, was 12%. The present value
factor of 1 for two periods at 12% is 0.797 while the present value factor of ordinary annuity of 1 for 2 periods at
12% is 1.690.

d. A tract of land was sold by the corporation to No Co. on July 1, 2021 for P6,000,000 under an installment sale
contract. No Co. signed a 4-year 11% note for P4,200,000 on July 1, 2021, in addition to the down payment of
P1,800,000. The equal annual payments of the principal and interest on the note will be P1,353,750 payable on July
1, 2022, 2023, 2024 and 2025. The land had an established cash price of P6,000,000, and its cost to the corporation
was P4,500,000. The collection of the installments on this note is reasonable assured.

QUESTIONS:

1. Noncurrent receivables as of December 31, 2021

a. 9,664,650 b. 9,750,726 c. 10,556,400 d. 13,556,400

2. Current portion of the long-term receivables as of December 31, 2021

a. P0 b. 3,000,0000 c. 3,891,750 d. 4,353,750

3. Accrued interest receivable as of December 31, 2021

a. 540,000 b. 771,000 c. 857,076 d. 1,011,000

4. Interest income for the year 2021

a. 1,281,000 b. 1,367,076 c. 1,512,000 d. 1,637,076

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