[ap] 07_receivables.docx

07-AUDIT OF RECEIVABLES AUDIT OF RECEIVABLES PROII EM NO. 1 In connection with your examination of the financial statements of JOHN, INC. for the year ended December 31, 2015, you were able to obtain certain Information during your audit of the Accounts Receivable and related accounts. A. The December 31, 2015, balance In the Accounts Receivable control account is ₱558,600. B. An aging schedule of the account receivable as of December 31, 2015, is presented below: Age 60 days and under 61 to 90 days 91 to 120 days Over 120 days

Net Debit Balance ₱258,513 204,735 59,886 35,466

Percentage to be Applied after Corrections have been made 1 percent 3 percent 6 percent Definitely uncollectible, ₱6,300; the remainder Is estimated to be 25% uncollectible.

P558,600 C. The only entries made in the Bad Debt Expense account were: 1. A debit on December 31 for the amount of the credit to the Allowance for Bad Debts. 2. A credit for ₱4,110 on November 30, 2015, and a debit to Allowance for Bad Debts because of a bankruptcy. The related sale took place on October 1, 2015. D. The Allowance for Bad Debts schedule is presented below: Debit January 1, 2015 November 30, 2015 ₱4,110 December 31, 2015 (P558,600 x 5%)

Credit

₱27,930

Balance ₱13,125 9,015 ₱36,945

E. There is a credit balance in one account receivable (61 to 90 days) of ₱7,260; it represents an advance on sales contract. REQUIRED: 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, 2015? A. ₱555,450 C. ₱540,930 B. ₱559,560 D. ₱548,190 2. How much Is the adjusted balance of the Allowance for Bad Debts as of December 31, 2015? A. ₱19,706 C. ₱19,83O B. ₱19,583 D. ₱19,147 3. How much is the Bad Debts expense for the year 2015? A. ₱16,991 C. ₱17,115 B. ₱16,868 D. ₱27,930 4. How much is the net adjustment to the Bad Debts expense account? A. ₱6,952 credit C. ₱6,829 credit B. ₱6,705 credit D. ₱4,110 debit

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07-AUDIT OF RECEIVABLES PROBLEM NO. 2 DOK Inc. had the following long term receivable account balances at December 31, 2014. Note receivable from sale of division Note receivable from officer

₱1,500,000 400,000

Transactions during 2015 and other information relating to Dok’s long-term receivables were as follows. 1. The ₱1,500,000 note receivable is dated May 1, 2014, bears interest at 9%, and represents the balance of the consideration received from the sale of Dok’s electronics division to York Company. Principal payments of ₱500,000 plus appropriate interest are due on May 1, 2015, 2016, and 2017. The first principal and Interest payment was made on May 1, 2015. Collection of the note installments is reasonably assured. 2. The ₱400,000 note receivable Is dated December 31, 2014, bears interest at 8%, and Is due on December 31 2017. The note is due from May Rox, president of Dok Inc. and is collateralized by 10,000 shares of Dok’s ordinary shares. Interest is payments annually on December 31, and all interest payments were paid on their due dates through December 31, 2015. The quoted market price of Dok’s ordinary shares was P45 per share on December 31, 2015. 3. On Apri1 1, 2015, Dok sold a patent to Pen Company in exchange for a ₱100,000 zero Interestbearing note due on April 1, 2017. There was no established exchange price for the patent, and the note had no ready market. The prevailing rate of interest for a note of this type at April 1, 2015, was 12%. The present value of P1 for two periods at 12% is 0.797 (use this factor). The patent had a carrying value of ₱40,000 at January 1, 2015, and the amortization for the year ended December 31, 2015, would have been ₱8,000. The collection of the note receivable from Pen Is reasonably assured. 4. On July 1, 2015, Dok sold a parcel of land to Sprinter Company for ₱200,000 under an instalment sale contract. Sprinter made a ₱60,000 cash down payment on July 1, 2015, and signed a 4-year 11% note for the ₱140,000 balance. The equal annual payments of principal and interest on the note will be ₱45,125 payable on July 1, 2016, through July 1, 2019. The land could have been sold at an establish cash price of ₱200,000. The cost of the land to Dok was ₱150,000. Circumstances are such that the collection of the installments on the note is reasonably assured. Based on the preceding information, calculate the following: 1. Accrued interest receivable on December 31, 2015 A. ₱75,400 C. ₱67,700 B. ₱99,700 D. ₱97,700 2. Carrying value on December 31, 2015, of the zero-Interest-bearing note from sale of patent A. ₱79,700 C. ₱92,827 B. ₱72,527 D. ₱86,873 3. Interest Income for the year ended December 31, 2015 A. ₱151,873 C. ₱154,264 B. ₱137,527 D. ₱159,573 4. Current portion of long term receivables on December 31, 2015 A. ₱537,425 C. ₱545,125 B. ₱529,725 D. ₱640,000 5. Total Long-term receivables on December 31, 2015 A. ₱1,103,102 C. ₱1,081,748 B. ₱1,097,148 D. ₱1,087,702

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07-AUDIT OF RECEIVABLES PROBLEM NO.3 1. The auditor finds a situation in which one person has the ability 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 could be most effective in discovering fraud in this scenario? A. Send positive confirmations to a 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. 2. In confirming accounts receivable, an auditor decided to confirm customers’ account balances rather than individual invoices. Which of the following most likely would be included with the dent’s confirmation letter? A. An auditor-prepared letter explaining that a non-response may cause inference that the account balance is correct. B. A client-prepared letter reminding the customer that a non-response will cause a second request to be sent. C. An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor. D. A client-prepared statement of account showing the details of the customer’s account balance. 3. Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipients? A. ‘This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope,” B. Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records.” C. “If you do not report any differences within fifteen days, it will be assumed that this statement is correct.” D. The following invoices have been selected for confirmation and represent amounts that are overdue.” 4. Auditors may use positive or negative forms of confirmation requests for accounts receivable. An auditor most likely will use A. The positive form to confirm all balances regardless of size. B. A combination of the two forms, with the positive form used for large balances and the negative form for the small balances, C. A combination of the two forms, with the positive form used for trade receivables and the negative form for other receivables. D. The positive form when the combined assessed level of inherent and control risk for assertions related to receivables is acceptably low, and the negative form when it is unacceptably high. 5. The negative request form of accounts receivable confirmation may be used when the Combined Assessed Level Inherent and Number of Small Consideration By The Control Risk Is Balances Is Recipient Is A. Low Many likely B. Low Few Unlikely C. High Few Likely D. High Many likely

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07-AUDIT OF RECEIVABLES 6. In the confirmation of accounts receivable, the auditor would most likely A. Request confirmation of a sample of the inactive accounts. B. Seek to obtain positive confirmations for at least 50% of the total peso amount of the receivables. C. Require confirmation of all receivables from agencies of the government D. Require that confirmation requests be sent within 1 month of the fiscal year-end. 7. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because A. A majority of recipients usually lack the willingness to respond objectively. B. Some recipients may report incorrect balances that require extensive follow-up. C. The auditor cannot infer that all non-respondents have verified their account Information. D. Negative confirmations do not produce evidence that is statistically quantifiable. 8. To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would A. Examine the shipping documents that provide evidence for the existence assertion. B. Verify the sources and contents of the faxes in telephone calls to the senders. C. Consider the faxes to be nonresponses and evaluate them as unadjusted differences. D. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted. 9. An auditor who has confirmed accounts receivable may discover that the sales Journal was held Q 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 than the amount being confirmed. D. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than the amount being confirmed. 10. Which of the following is the greatest drawback of using subsequent, collections evidenced only by a deposit slip as an alternative procedure when responses to positive accounts receivable confirmations are not received? A. Checking subsequent collections can never be used as an alternative auditing procedure. B. By examining a deposit slip only, the auditor does not know whether the payment is for the receivable at the balance sheet date or a subsequent transaction. C. A deposit slip Is not received directly by the auditor. D. A customer may not have made a payment on a timely basis. 11. All of the following are examples of substantive tests to verity the valuation of net accounts receivable except the A. Recomputation of the allowance for bad debts. B. Inspection of accounts for current versus noncurrent status In the statement of financial C. Inspection of the aging schedule and credit records of past due accounts. D. Comparison of the allowance for bad debts with past records.

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