AUDITING AND ASSURANCE:

CONCEPTS AND APPLICATIONS 1

Ishmael Y. Reyes, CPA

 Table of Contents

Module 1: Audit of Cash and Cash Equivalent 1

Introduction 1
Learning Outcomes 1
Lesson 1. Audit Objectives 1
Lesson 2. Audit Procedures 2
Lesson 3. Sample Problem 1-1: Santiago Company 3
Lesson 4. Sample Problem 1-2: Onor Company 3
Lesson 5. Sample Problem 1-3:Benjamin Corporation 8
Lesson 6. Sample Problem 1-4: Ursula Company 11
Lesson 7. Sample Problem 1-5: Samantha, Inc. 14
Lesson 8. Sample Problem 1-6: Tanya Company 15
Assessment Task 16
Summary 17
References 18
Module 2. Audit of Cash and Cash Equivalent 2
Introduction 19
Learning Outcomes 19
Lesson 1. Sample Problem 2-1: ABX, Inc. 19
Lesson 2. Sample Problem 2-2: NARCISA Company 22
Lesson 3. Sample Problem 2-3: Fermin Company 26
Lesson 4. Sample Problem 2-4: Ian Company 27
Assessment Task 30
Summary 31
References 31

Module 3. Audit of Receivables

Introduction 32
Learning Outcomes 32
Lesson 1. Audit of Receivables Objectives 32
Lesson 2. Audit of Receivables Procedures 33
Lesson 3. Sample Problem 3-1: Upat Company 34
Lesson 4. Sample Problem 3-2: Inuyasha Company 37
Lesson 5. Sample Problem 3-3: Rovers, Inc. 39
Lesson 6. Sample Problem 3-4: IYR Company 41
Lesson 7. Sample Problem 3-5: The Mexican Company 42
Lesson 8. Sample Problem 3-6: Ikebana Company 43
Assessment Task 45
Summary 46
References 47
Module 4. Audit of Receivables 2
Introduction 48
Learning Outcomes 48
Lesson 1. Sample Problem 4-1 : Forever Company 48
Lesson 2. Sample Problem 4-2 : Bunsoy Company 50
Lesson 3. Sample Problem 4-3 : Visage Corporation 51
Lesson 4. Sample Problem 4-4 : YZA, Inc 53
Lesson 5. Sample Problem 4-5: Isaiah Corporation 54
Assessment Task 55
Summary 56
References 57
Course Code: AUDIT 2

Course Description: This course tests the students’ proficiency in

applying audit standards, techniques, and procedures to a typical
independent audit of a medium-sized service, trading or manufacturing
concern.

Course Intended Learning Outcomes (CILO):

At the end of the course, students should be able to:

1. Plan and perform an audit

2. Analyze data for possible errors and irregularities

3. Formulate adjusting entries, resolve audit issues

4. Prepare working papers and complete the audit including the

preparation of the audit report.

Course Requirements:
 Assessment Tasks - 60%
 Major Exams - 40%
Periodic Grade 100%

PRELIM GRADE : 60% (Activity 1-4) + 40% (Prelim exam)

MIDTERM GRADE : 30% (Prelim Grade) + 70 % [60% (Activity 5-7)
+ 40% (Midterm exam)]
FINAL GRADE : 30% (Midterm Grade) + 70 % [60% (Activity 8-10)
+ 40% (Final exam)]
 MODULE 1

Audit of Cash and Cash Equivalents 1

Introduction

Auditing cash tends to be straightforward. We usually just obtain the bank

reconciliations and test them. We send confirmations and vouch the outstanding reconciling
items to the subsequent month’s bank statement. But are such procedures always adequate?
Hardly. in this section, we will look at the audit objectives and procedures involved in the audit
of cash and cash equivalents and we will solve CPA board exam-type problems.

Learning Outcomes

After completing the module, the student should be able to:

1. Determine the audit objectives and procedures involved in the audit of cash and cash
equivalents

2. Solve cash balances audit problems

3. Construct a working paper for solving problems involving cash balances

Lesson 1. Audit Objectives (Roque , 2018)

The objectives of audit of cash and cash equivalents are to:

1. express cash balances at the end of the reporting period represent cash and cash items on
hand, in transit to, or in depository banks.

2. show that cash transactions have been properly recorded.

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3. prove that cash balances are properly described and classified, and adequate disclosures
with respect to amounts restricted as to withdrawal are made in the financial statements
(Roque, 2018).

Lesson 2. Audit Procedures (Roque, 2018)

1. Conduct a cash count of undeposited collections, petty cash, and other funds.
a) Obtain custodian's signature to acknowledge return of items counted.
b) Reconcile items counted with general ledger balances.
c) Trace undeposited collections counted to bank reconciliation
d) Follow up dispositions of items in cash counted:
i. Undeposited collections should be traced to bank deposits.
ii. Checks accommodated in petty cash should be deposited after the count to
establish their validity.
iii. IOUs in the petty cash should be confirmed and traced to collections in the next
payroll period.
iv. Expense vouchers should be traced to the succeeding replenishment voucher.
e) Coordinate cash count with count of marketable securities and other negotiable
assets of the client.
f) Obtain confirmation of year-end fund balances of cash not counted in branches or
other offices.
2. Confirm bank balance by direct correspondence with all banks in which the client has had
deposits and loans during the year.

3. Obtain bank reconciliation.

a) Check arithmetical accuracy of reconciliation.
b) Trace balance per book to the general ledger balance of cash account.
c) Trace balance per bank to bank statement and compare with amount confirmed by
bank.
d) Establish authenticity of reconciling items by reference to their respective sources,
like:
i. Bank debit or credit advices.
ii. Duly approved journal vouchers.

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 e) Investigate checks outstanding for a long period of time.
i. Consider adjustment, especially if the check is already stale.
ii. Consider the possibility of an erroneous preparation of the check.
iii. Investigate any unusual reconciling items.
iv. Where internal control over cash is weak, consider preparing a proof of cash
reconciliation.

4. Obtain cut off bank statement showing the client's transactions with the bank at least one
week after the reporting date, and:
a) Trace year-end reconciling items, like:
i. Deposit of the year-end undeposited collections.
ii. Completeness of year-end outstanding checks.
iii. Corrections of bank errors.
b) Examine supporting documents of year-end outstanding checks that did not clear in
the cut off bank statement.

5. Obtain a list of interbank transfers of funds a few days before and after the reporting date.
i. Vouch supporting documents.
ii. Ascertain that the related receipts and disbursements were booked by the client
within the same day or at least within the same month.

6. Test reasonableness of cut off by.

a) Comparing dates of checks returned with cut off bank statement to dates of recording
in the cash disbursements register.
b) Tracing receipts recorded a few days before the reporting date to bank deposits.

7. Inspect savings account passbook and certificates of deposits.

a) Reconcile with book balances.
b) Update interest earned posting on passbooks, if necessary.
c) Compare balances with bank confirmation reply.

8. Determine any restrictions on availability of cash.

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9. Determine propriety of financial statement presentation and adequacy of disclosures
(Roque, 2018).

Lesson 3. Sample Problem 1-1 : Santiago Company (Cabrera, 2018)

The accountant of Santiago Company is in the process of preparing the company’s financial
statements for the year ended December 31, 2018. He is trying to determine the correct
balance of cash and cash equivalents to be reported as a current asset in the statement of
financial position. The following items are being considered:

 Balances in the company’s accounts at the Metropolitan Bank:

Current account P81,000
Savings account 132,600

 Undeposited customer checks of P22,200 (including a customer check dated January 2,

2019, for P3,000).

 Currency and coins on hand P3,480.

 Savings account at the Northern Philippines Bank with a balance of P2,400,000. this
account is being used to accumulate cash fro future plant expansion (in 2019).

 P120,000 in a current account at the Northern Philippines Bank. This represents a 20%
compensating balance for P600,000 loan with the bank. Santiago Company is legally
restricted to withdraw funds until the loan is due in 2021.

 Treasury Bills:
Two-month maturity bills P90,000
Seven-month bills 120,000
 Time deposit (placement term is 2 months), P100,000.

What total amount of cash and cash equivalents should be reported under current assets?

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Answer: P427,480

Solution:
Savings and current accounts - Metropolitan Bank (P132,600 + P81,000) P213,600
Undeposited customer checks (P22,200 - P3,000) 19,200
Currency and coins on hand 3,480
Petty cash 1,200
Two-month treasury bills 90,000
Time deposit 100,000
Total cash and cash equivalents P427,480

Lesson 3: Sample Problem 1-2: Onor Company (Roque, 2018)

1. In connection with your audit of the financial statements of Onor Company for the year
ended December 31, 2018, you gathered the following information.

The company maintains its current account with Tsunami Bank. The bank statement on
December 31, 2018, showed a balance P638,340.

Your audit of the company’s account with Tsunami Bank disclosed the following:

 A check for P22,500 received from a customer whose account is current had been
deposited and then returned by the bank on December 28, 2018. No entry was made for
the return of this check. The customer replaced the check on January 15, 2019.

 A check for P5,720 was cleared by the bank as P7,520. the bank made the correction on
January 2, 2019.

 A check for P3,500 representing payment of an employee advance was received and
deposited on December 27, 2018, but was not recorded until January 3, 2019.

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 Postdated checks totaling P67,300 were included in the deposit in transit. These
represent collections of current accounts receivable from customers. The checks were
actually deposited on January 5, 2019.

 Various debit memos for drafts purchased for payment of importation of equipment
totaling P230,000 were not yet recorded. These purchases were set up as accounts
payable. Said equipment arrived in December 2018.

 Interest earned on the bank balance for the 4th quarter of 2018, amounting to P1,950 was
not recorded.

 Bank service charges totaling P1,260 were not recorded.

 Deposit in transit and outstanding checks at December 31, 2018 totaled P136,250 and
P276,380 respectively.

2. Various expenses from the company’s imprest petty cash fund dated December 2018,
totaled P16,250, while those dated January 2019, amounted to P5,903. Another disbursement
from the fund dated December 2018 was a cash advance to an employee amounting to
P3,500. a replenishment if the petty cash fund was made on January 8, 2019.

3. The company’s trial balance on December 31, 2018, includes the following accounts:

Cash in bank - Tsunami Bank P748,320

Cash in bank - Earthquake bank restricted account for
plant expansion, expected to be disbursed in 2019) 700,000
Petty cash fund 30,000
Time deposit, placed December 20, 2018, and due
March 20, 2019 1,000,000
Money market placement - Prudential Bank 4,000,000

1. What is the adjusted petty cash fund balance on December 31, 2018?
2. The petty cash shortage on December 31, 2018 is

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3. What is the adjusted Cash in Bank - Tsunami Bank balance on December 31, 2018?
4. The entry to adjust the Cash in Bank - Tsunami Bank account should include a debit to AR
-
5. The December 31, 2018, statement of financial position should show “Cash and cash
equivalents” at -

Answers:
1. P10,250
2. P0
3. P432,710
4. P89,800
5. P5,442,960

Solutions:
1. Petty cash fund per trial balance P30,000
Various expenses dates December 2018 (16,250)
Employee cash advance (3,500)
Adjusted petty cash fund balance 10,250

2. Insufficient information
Book Bank
Unadjusted balances P748,320 P638,340
NSF Check (22,500)
Bank error (7,520 - 5,720) 1,800
Unrecorded cash receipt 3,500
Postdated checks (67,300)
Bank debit memos (230,000)
Interest earned 1,950
Bank service charges (1,260)
Outstanding checks (276,380)
Adjusted balances P432,710 P432,710

3. Accounts receivable (22,500 + 67,300) 89,800

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Accounts payable 230,000
Bank service charges 1,260
Cash in bank 315,610
Advances to employees 3,500
Interest income 1,950

4. Cash in Bank - Tsunami Bank P432,710

Petty cash fund 10,250
Time deposit 1,000,000
Money market placement 4,000,000
Cash and cash equivalent P5,442,960

Lesson 5: Sample Problem 1- 3: Benjamin Corp. (Roque, 2018)

In connection with your audit of the financial statements of Benjamin Corp for the year ended
December 31, 2018, you conducted a surprise count of the company’s petty cash fund and
undeposited collections at 8:20a.m. on January 3, 2019. Your count disclosed the following:

Bills and coins

Bills Coins
P100.00 5 pieces 5.00 18 pieces
P50.00 40 pieces 1.00 206 pieces
P20.00 48 pieces 0.25 32 pieces

Checks
Date Payee Maker Amount
Dec 30 Cash Custodian P1,200
Dec 30 Benjamin Corp SLV Inc 14,000
Dec 31 Benjamin Corp Mario Lansang, sales manager 1,680
Dec 31 Benjamin Corp MSU Corp 17,800
Dec 31 Benjamin Corp Ateneo Inc 8,300
Dec 31 Taiwan Corp Benjamin Corp 27,000

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Unreimbursed vouchers
Date Payee Desciption Amount
Dec 23 Mario Lansang, sales manager Advance for trip to Tagaytay P20,000
Dec 28 Central Post Office Postage Stamps 1,620
Dec 29 Messengers Transportation 150
Dec 29 Byte Inc Computer repair 800

Other items found inside the cash box:

1. Unclaimed pay envelope of Juan MacDonut. Indicated on the pay slip is his net salary of
P7,500. your inquiry revealed that Juan’s salary is mingled with the petty cash fund.

2. The sales manager’s liquidation report for his Tagaytay City trip.
Cash advance received on Dec 23 P20,000
Less: Hotel accommodation, meals, etc. P16,000
Bus fare for two 1,200
Cash given to Pablo, salesman 1,000 18,200
Balance P1,800
Accounted for as follows:
Cash returned by Pablo to the sales manager P120
Personal check of the sales manager 1,680
Total P1,800

Additional information:

1. The custodian is not authorized to cash checks.

2. The last official receipt included in the deposit on December 30 is No. 4351 and the last
official receipt issued for the current year is No. 4355. the following official receipts are all
dated December 31, 2018.
OR No Amount Form of Payment
4352 P13,600 Cash
4353 17,800 Check
4354 3,600 Cash

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 4355 8,300 Check
The petty cash balance per general ledger is P25,000. the last replenishment of the fund was
made on December 22, 2018.

1. What is the amount of shortage due from the sales manager?

2. What is the amount of undeposited collections on December 31, 2018?
3. The adjusting entries on December 31, 2018, should include a net debit to Travel Expenses
of -
4. The cash count should include total checks of -
5. What is the total cash shortage?

Answers:
1. P240
2. P57,300
3. P18,080
4. P42,980
5. P22,166

Solutions:

1. Cash advance P20,000

Less: Actual cash disbursed P16,000
Hotel, meals, etc 1,300
Pablo (P1,000 - P120) 880 18,080
Cash that should be returned 1,920
Cash actually returned 1,680
Shortage due from sales manager P240
2. Collections per OR nos. 4352 - 4355 P43,300
Unreceipted collections 14,000
Total undeposited collections P57,300

3. Travel expenses (P16,000 + P1,200 + P880) P18,080

4. Total checks P42,980

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5. Total cash shortage P22,166

Benjamin Corp
Cash Count Sheet
January 3, 2019
Bills and coins:
Denomination Quantity Amount Total
P100 5 P500
50 40 2,000
20 48 960
5 18 90
1 206 206
.25 32 8 P3,764
Checks:
Date Maker Amount
Dec 30 Custodian P1,200
Dec 30 SLV Inc 14,000
Dec 31 Mario Lansang 1,680
Dec 31 MSU Corp 17,800
Dec 31 Ateneo Inc 8,300 42,980
Unreimbursed vouchers
Date Account Amount
Dec 23 Advances P20,000
Dec 28 Postage 1,620
Dec 29 Transportation 150
Dec 29 Repairs 800 22,570
Total cash accounted P69,314
Less: Accountabilities
Petty cash P25,000
Collections (per official receipts) 43,300
Unclaimed salary 7,500
Excess travel advance 1,680
Unreceipt4ed collection from SLV Inc 14,000 91,480

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Cash shortage (22,166)
Benjamin Corp
Adjusting Journal Entries
December 31, 2018

1. Cash P14,000
Accounts Receivable P14,000

2. Advances to officers and employees 20,000

Postage Expense 1,620
Transportation Expense 150
Repairs Expense 800
Petty cash fund 22,570

3. Unused postage 365

Postage expense 365

4. Cash 27,000
Accounts Payable 27,000

5. Cash 7,500
Salaries Payable 7,500

6. Receivable from custodian 22,166

Cash 22,166

7. Travel expenses (P16,000 + P1,200 + P880) 18,080

Petty cash fund 1,680
Advances to officers and suppliers 19,760

Lesson 6. Sample Problem 1-4: Ursula Company ( Empleo, 2018)

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The following information has been extracted from the accounting records of Ursula Company
at December 31, 2018:
a) Cash on hand (see note below) P230,000
b) Impukan Bank savings account (the required minimum Monthly
Average Daily Balance is P10,000) 9,500
c) 364-day Treasury Bills purchased March 1, 2018 400,000
d) Petty cash fund (see note below) 20,000
e) Tipid Bank current account (see notes below) 160,000
f) Time deposit placements:
Date Term
Dec 15, 2018 30 days 30,000
Oct 31, 2018 90 days 40,000
Nov 30, 2018 180 days 25,000
g) Employee travel advances 7,000
h) Cash in bond sinking fund 500,000
i) Customer’s note receivable 45,000
j) Postage stamps 2,400
The following are included in cash on hand:
 A customer check for P43,000 returned by the bank on December 28, 2018. it was
redeposited and cleared the bank on January 2, 20109.
 A customer check for P75,000 dated January 3, 2019, received December 27, 2018.
 PHILPost money orders received from customers, P30,000.
The petty cash fund consists of the following:
Currency and coins P13,500
IOUs from officers and employees 3,000
Unreplenished petty cash disbursements 1,500
Currency in envelope with the notation:
“We were Bang Quay’s coworkers. Words may
not be adequate to express how sorry we feel.
Please accept our heartfelt sympathies on the
loss of your loved one.” 1,500
20,000

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The following information pertains to Tipid Bank current account:
 A check for P13,000 was dated and recorded on December 29, 2018, but was delivered
to payee on January 5, 2019.
 A check for P5,000 dated January 10, 2019, payable to a supplier was recorded and
released to payee on December 19, 2018. Tipid Bank requires the current account
depositors to maintain a monthly average of daily balance of P50,000.

What total amount should be recorded as cash and cash equivalents on December 31, 2018?

Lesson 7 . Sample Problem 1-5: Samantha Inc. (Empleo, 2018)

The auditor for Samantha Inc. examined the petty cash fund immediately after the close
of business, July 31, 2018, the end of the company’s natural business year. The petty cash
custodian presented the following during the count:
Currency P1,650
Petty cash vouchers:
Postage 420
Office supplies expense 900
Transportation expense 340
Computer repairs 800
Advances to office staff 1,500
A check drawn by Samantha Inc,
payable to the petty cash custodian 7,200
Postage stamps 300
An employee’s check, returned by the bank,
marked NSF 1,000
An envelope containing currency of P1,890
for a gift for a retiring employee 1,890
16,000
The general ledger shows an imprest petty cash fund balance of P16,000.

1. How much is the petty cash shortage or overage?

2. What is the adjusted balance of the petty cash fund at July 31, 2018?

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Lesson 6. Sample Problem 1-6: (Espenilla, 2017)

On January 1, Tanya Co establishes a petty cash account and designates Orly Reyes as
petty cash custodian. The original amount included in the petty cash fund is P10,000. The
following disbursements are made from the fund:
Office supplies P3,460
Postage 2,240
Entertainment 840

The balance in the petty cash box is P3,200.

1. The person responsible, at all times for the petty cash fund is the
a) Chairman of the board of directors
b) President of the company
c) Petty cash custodian
d) General cashier
2. The following are appropriate procedures for controlling the petty cash fund, except
a) To monitor variations in different types of expenditures, the petty cash custodian files
petty cash vouchers by category of expenditure after replenishing the fund.
b) To replenish the fund, the general cashier issues a company check to the petty cash
custodian, rather than cash.
c) To determine that the fund is being accounted for satisfactorily, surprise counts of
the fund are made from time to time by the internal auditor or other responsible
official.
d) Each individual to whom petty cash is paid is required to present signed receipts to
the petty cash custodian.
3. The entry to replenish the fund is -
4. The objective of establishing a petty cash fund is to
a) Cash checks for employees
b) Account for all cash receipts and disbursements
c) Account for cash sales
d) Facilitate payment of small, miscellaneous items

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5. What is the effect of not replenishing the petty cash at year-end and not making the
appropriate adjusting entry?
a) A detailed audit is essential
b) The petty cash custodian should turn over the petty cash to the general cashier
c) Cash will be overstated and expenses understated
d) Expenses will be overstated and cash will be understated

Assessment Task 1

The cash account of the BEA Corporation as of December 31, 2018, was composed of the
following: (Roque, 2018)

On deposit in current account account with the Bank of PI P900,000

Cash collection not yet deposited to the bank 350,000
A customer’s check returned by the bank for insufficient fund 150,000
A check drawn by the Vice-President of the company dated January 15, 2019 70,000
A check drawn by a supplier dated December 28, 2018, for goods
returned by the company 60,000
A check dated May 31, 2018, drawn by the company against the
Bank of Manila in payment of customs duties.
Since the importation did not materialize, the check
was returned by the customs broker. This check was an
outstanding check in the reconciliation of the Bank of Manila 410,000
Petty cash fund of which P10,000 is in currency; P7,200 in form of
employees’ IOUs; and P2,800 is supported by approved petty
cash vouchers for expenses all dated prior to closing of the books
on December 31, 2018 20,000
Total P1,960,000
Less: Overdraft with the Bank of Manila secured by a chattel mortgage
on the inventories 300,000
Cash balance per ledger P1,660,000

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What is the amount of cash to be reported on the December 31, 2018, statement of financial
position of Bea Company?

Summary

For cash count problems:

1. Identify the accountability

a) If Petty Cash Fund, the accountability is the Imprest Balance per General Ledger.
b) If Undeposited Collections, the accountability is total undeposited collections per
books/records adjusted further for any unrecorded collections (based on additional
information of the problem) If there is no direct information about collections per
records, accountability is collections per Official Receipts, Cash receipt vouchers or
other documents evidencing collections.
c) Other collections (e.g. return of expense advance, collection for charities or any other
purposes not in tact and assumed to have been included among currencies on hand.
If the said collections for any other purpose is in tact, the same shall be ignored in
the cash count.
2. Identify valid supports to the accountability as presented in the problem
a) For Petty Cash Fund, acceptable valid support shall include:
 Bills and Coins, Replenishment Check, encashable Accommodated Checks (Valid
cash items)
 Unreplenished Petty Cash Expense Vouchers (Adjusted to various expense
accounts)
 Employee IOUS (Adjusted to receivables)
 Post dated/NSF Checks (Assumed to be previously accommodated checks which
shall be adjusted to receivable)
 unused postage is not a valid support where the accountability is the Petty Cash
Fund
 return of an expense advances (eg. excess from travel advance) is added to the
accountability to get the total accountability and not added to valid supports
b) For Undeposited Collections

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  Bills and Coins
 Depositable Customer Collection Checks as of the count date (Post dated, stale and
NSF collection checks as of the count date are not included as valid collection, thus
should not be included as valid support)
 Copies of expense vouchers evidencing the use of the collection to pay certain
expenses
 Unused postage stamps (valid support where accountability is Undeposited
Collections.).

References

Cabrera, M.B., & Cabrera, G.B. (2018). Reviewer in Auditing Problems. Manila. manila
Accounting Bookstores.
Empleo, P.M. (2018) . Practical Auditing.
Espenilla. et. al. (2017). Auditing Problems Reviewer. ReSA. Sampaloc, Manila.
Roque, G. (2018). CPA Examination Reviewer: Auditing Problems, CM Recto Avenue,
Manila, Philippines. GIC Enterprises & Co., Inc.

MODULE 2

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 Audit of Cash and Cash Equivalents 2:
Sample Problems

Introduction

This section is a continuation of the previous section on the audit of cash and cash
equivalents. We will now focus on problems involving the petty cash fund, bank reconciliation

and the proof of cash. This module focuses solely on problem solving using accounting
procedures on cash audit and cash equivalents,

The emphasis of this portion are all hands-on exercises, the very fact that all the
theories and principles were tackled in the course- Audit 1.

Learning Outcomes

After completing the module, the student should be able to:

1. Solve cash balances audit problems (petty cash fund, bank reconciliation, proof of
cash)
2. Construct a working paper for solving problems involving cash balances
3. Explain the relationship existing between cash and cash equivalents
4. Perform operational procedures involving cash balances.

Lesson 1 . Sample Problem 2-1: ABX, Inc. (Espinilla, 2017)

Anying Velsaco is reviewing the cash accounting for ABX, Inc. Anying’s review will focus
on the petty cash fund account and the bank reconciliation for the month ended May 31, 2018.
She has collected the following information from ABX’s bookkeeper for this task.

Petty Cash Fund

1. The petty cash fund was established on May 2, 2018, in the amount of P10,000.

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2. Expenditure from the fund by the custodian as of May 31, 2018, were evidenced by
approved petty cash vouchers for the following:
Various office supplies P3,920
IOU from employees 1,200
Shipping charges 2,298
Miscellaneous Expense 1,526

On May 31, 2018, the petty cash fund was replenished and increased to P12,000; currency
and coins in the fund at that time totaled P756.

Bank Reconciliation
Shore Bank
Bank Statement
Disbursements Receipts Balance
Balance, May 1, 2018 P350,760
Deposits P1,120,000
Note payment direct from customer
(interest of P1,200) 37,200
Checks cleared during may P1,246,000
Bank service charges 1,080
Balance, May 31, 2018 260,880

ABX, Inc’s Cash Account P354,000

Deposits during May 2018 1,240,000
Checks written during May 2018 1,273,400

Deposits in transit are determined to be P120,000 and checks outstanding at May 31 total
P34,000. Cash on hand (besides petty cash fund) at May 31, 2018, is P9,840.

1. What is the amount of petty cash shortage?

2. The journal entry to record the replenishment of, and increase in the petty cash fund
includes a credit to Cash -

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3. What amount of cash should be reported in the May 31, 2018, statement of financial
position?

Answers:
1. P300
2. P11,244
3. P368,720

Solutions:
1. Coins and currency P756
Fund disbursements (P3,920 + P1,200 + P2,298 + P1,526) 8,944
Petty cash accounted 9,700
Custodian’s accountability 10,000
Petty cash shortage P300

2. Petty cash fund P2,000

Office supplies 3,920
Accounts receivable-employees 1,200
Shipping expense 2,298
Miscellaneous expense 1,526
Cash short/over 300
Cash P11,244

3. Book Bank
Unadjusted balances P320,600 P260,880
Deposit in transit 120,000
Cash on hand 9,840
Outstanding checks (34,000)
Note collected by bank 37,200
Bank service charges (1,080)
Adjusted balances 356,720 356,720

Adjusted cash balance (P356,720 + P12,000) P368,720

21
Lesson 2. Sample Problem 2-2: NARCISA Co. (Roque, 2018)

Presented below are a series of unrelated situations. Answer the question at the end of each
situation.

1. The accountant of NARCISA Co. Provided the following data in reconciling the April 30
cash in bank balance:
Balance per bank, April 30 P130,350
Balance per books, April 30 85,000
Bank service charge 2,000
Deposit in transit 49,000
Outstanding checks 17,650
Note collected by bank including P11,200 interest (Narcisa Co.
not yet informed) 136,000
Check drawn by XYZ Co erroneously charged by bank to Narcissa’s
account 54,600
A transposition error was made in recording a sale and deposit in the sales journal and cash
receipts journal in April.
Correct Amount P13,658
Recorded as 16,358

What is the adjusted cash balance on April 30?

2. The following information is included in EMIL Corporation’s bank statement for the month
of March:
A customer’s check has been marked “NSF” by the bank and returned P13,000
Bank service charge for March 1,200

In comparing the bank statement to the company’s cash records, you found:
Outstanding checks on March 31 P184,000
Deposits made but are not yet shown in the April bank statement 14,000

22
The deposits in transit and outstanding checks have been correctly taken up in the company’
s books. You also found a customer’s check for P17,400 that had not yet been deposited and
had not been recorded in Emil’s books. Your client’s books show a cash balance of P36,420.

What is Emil Corporation’s correct cash balance at March 31?

3. The following information pertains to a checking account of a company at June 30, 2018.
Balance per bank statement P200,000
Interest earned for the second quarter 500
Outstanding checks 15,000
Customer’s checks returned for insufficient funds 5,000
Deposit in transit 25,000

What is the cash balance per books at June 30, 2018?

4. A company is reconciling its bank statement with internal records. The cash balance per
the company’s books is P45,000. there are P5,000 of bank charges not yet recorded, P7,500
of outstanding checks, P12,500 of deposits in transit and P15,000 of bank credits and
collections not yet taken up in the company’s books.

What is the cash balance per bank?

5. A company shows a cash balance of P175,000 on its bank statement dated June 30. As of
June 30, there are P55,000 of outstanding checks and P37,500 of deposits in transit.

What is the adjusted cash balance on June 30?

6. The cash account shows a balance of P225,000 before reconciliation. The bank statement
does not include a deposit of P11,500 made on the last day of the month. The bank statement
shows a collection by the bank of P4,700 and a customer’s check for P1,600 was returned
because it was NSF. A customer’s for P2,250 was recorded on the books as P2,700 and a
check written for P395 was recorded as P485.

23
What should be the correct cash balance?

7. On July 5, 2018, Emilia Corp received its bank statement for the month ending June 30.
the statement showed a P209,500 balance while the cash account balance on June 30 was
P35,000. in reconciling the balances, the auditor discovered that:

1. The June 30 collection of P176,000 were recorded on the books but were not
deposited until July.
2. The bank service charges for the month of June totaled P3,000.
3. A paid check for P24,300 was entered incorrectly in the cash payments journal as
P34,200.

What is the total outstanding checks at June 30, 2018?

Answers:
1. P216,300
2. P39,620
3. P214,500
4. P50,000
5. P157,500
6. P227,740
7. P343,600

Solutions:
1. Book Bank
Unadjusted balances P85,000 P130,350
Bank service charge (2,000)
Deposit in transit 49,000
Outstanding checks (17,650)
Collection of note 136,000
Erroneous bank debit 54,600
Transposition error (P16,358 - P13,658) (2,700)
Adjusted balances P216,300 P216,300

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2. Balance per books P36,420
Unrecorded and undeposited customer’s check 17,400
Bank service charge (1,200)
NSF check (13,000)
Adjusted cash balance P39,620

3. Balance per bank statement P200,000

Outstanding checks (15,000)
Deposit in transit 25,000
Interest earned (500)
NSF checks 5,000
Balance per books at June 30, 2018 P214,500

4. Balance per books P45,000

Bank charges (5,000)
Outstanding checks 7,500
Deposits in transit (12,500)
Bank credits and collections 15,000
Adjusted cash balance P50,000

5. Balance per bank statement P175,000

Outstanding checks (55,000)
Deposits in transit 37,500
Adjusted cash balance P137,500

6. Balance per books P225,000

Bank collection 4,700
Customer’s NSF check (1,600)
Overstatement of cash receipt (P2,700 - P2,250) (450)
Overstatement of cash disbursement (P485 - P395) 90
Adjusted cash balance P227,740

25
7. Balance per books, June 30, 2018 P35,000
Bank service charges (3,000)
Overstatement of disbursement (P34,200 - P24,300) 9,900
Adjusted cash balance P41,900

Balance per bank, June 30, 2018 P2019,500

Add: Undeposited collections 176,000
Total 385,500
Less: Adjusted cash balance 41,900
Outstanding checks, June 30, 2018 P343,600

Lesson 3. Sample Problem 2-3: Fermin Company (Espinilla, 2017)

Fermin Company’s check register shows the following entries for the month of December:

Date Checks Deposits Balance

Dec 2018
1 Beginning balance P89,300
5 Deposit P65,000 154,300
7 Check 14344 P32,500 120,800
11 Check 14345 14,000 106,800
26 Deposit 49,000 155,800
29 Check 14346 8,600 147,200

Fermin ’ s bank reconciliation fro November revealed one outstanding check (14343) for
P12,000 (written on November 28), and one deposit in transit for P5,550 (made on November
29).
The following is from Fermin’s bank statement for December 2018:

Date Checks Deposits Balance

Dec 2018

1 Beginning balance P95,750

26
1 Deposit P5,550 101,300
4 Check 14344 P32,500 68,800
5 Deposit 56,000 124,800
14 Check 14345 14,000 110,800
15 Loan proceeds 500,000 610,800
20 NSF Check 7,600 603,200
29 Service charge 1,000 602,200
31 Interest 3,600 605,800

Assume that all errors were committed by Fermin Company, not the bank.

Based on the preceding information, determine the following:

1. Adjusted cash balance on November 30
2. Outstanding checks on December 31
3. Deposit in transit on December 31
4. Total bank receipts in December
5. Adjusted cash balance on December 30

Lesson 4. Sample Problem 2-4: IAN Company ( Espenilla, 2016)

The bank statement for the current account of IAN Co showed a December 31, 2018,
balance of P585,284. information that might be useful in preparing a bank reconciliation is as
follows:
a) Outstanding checks were P52,810.
b) The December 31, 2018, cash receipts of P23,000 were not deposited in the bank until
January 2, 2019.
c) Our check written in payment of rent P8,940 was correctly recorded by the bank but was
recorded by Ian Con as a P9,840 disbursement.
d) In accordance with prior authorization, the bank withdrew P18,000 directly from the
current account as payment on a mortgage note payable. The interest portion of that
payment was P14,000. Ian Co has made no entry to record the automatic payment.
e) Bank service charges of P740 were listed on the bank statement.

27
f) A deposit of P35,000 was recorded by the bank on December 12, but it did nto belong to
Ian Co.
g) The bank statement included a charge of P3,400 for a not-sufficient-fund check. The
company will seek payment from the customer.
h) Ian Co maintains an P8,000 petty cash fund that was appropriately reimbursed at the end
of December.
i) According to instructions from Ian Co on December 31, the bank withdrew P40,000 from
the account and purchased treasury bills for Ian Co. The company recorded the
transactions in its books on December 31 when it received notice from the bank. Half of
the treasury bills mature in three months and the other half in six months.

1. What is the cash in bank balance per books on December 31, 2018?
2. What is the adjusted cash in bank balance on December 31, 2018?
3. What amount of cash and cash equivalents should be shown under current assets on
December 31, 2018?

Lesson 5. Sample Problem 2-5: Edgardo Company (Espinilla, 2016)

Edgardo Co was organized on January 2, 2018. the following items are from the company’s
trial balance on December 31, 2018.
Ordinary share capital P1,500,000
Share Premium 150,000
Merchandise Inventory 69,000
Land 1,000,000
Building 1,400,000
Furniture and fixtures 367,000
Accounts receivables 165,400
Accounts payable 389,650
Notes payable - bank 500,000
Sales 6,235,200
Operating expenses (including depreciation of P400,000) 1,005,150

Additional information is as follows:

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Deposits in transit, December 31 P384,660
Service charge for December 2,000
Outstanding checks, December 31 475,000
Bank balance, December 31 892,000
Edgardo Co’s mark up on sales is 30%

1. What is the total collections from sales?

2. What is the total payments for merchandise purchases?
3. What is the total cash receipts per books?
4. What is the total cash disbursements per books?
5. What is the cash balance per books on December 31?
6. What is the adjusted cash balance on December 31?

Lesson 5. Sample Problem 2-5: Annie Corp. (Roque, 2018)

In connection with your audit of the cash account of Annie Corp, you gathered the following
information.
Balance per bank, December 1, 2018 P145,000
Total bank receipts (credits) in December 346,000
Balance per bank, December 31, 2018 114,500
Outstanding checks, Nov 30, 2018 (including P12,000 paid by
bank in December) 67,000
Outstanding checks, December 31, 2018 (including checks issued
in November) 94,162
Deposit in transit, Nov 30, 2018 39,458
A customer’s check received on December 4, 2018, was returned by bank
on December 7 marked NSF. It was redeposited on
December 8, 2018.The only entry made was to take up the
collection on December 4, 2018 11,143

1. What is the total book receipts in December?

2. What is the total bank disbursements in December?
3. What is the total book disbursements in December?

29
 Assessment Task 2
Your audit of the cash account of Junie Corp, disclosed the following information:

1. Cash in bank balance per books, Dec 31, 2018 P35,000

2. Bank statement balance, Dec 31, 2018 60,000
3. Note collected by bank in December (principal plus interest of P800, less
collection fee of P200) 27,600
4. Debit memo for a checkbook ?
5. Deposits in transit, Dec 31, 2018 15,200
6. Transposition error made by bank in recording deposit of
December 28:
Correct amount P45,000
Recorded as 54,000 9,000
7. Erroneous bank debit 26,700
8. Included in the Cash in bank account is petty cash fund of P10,000, Your count on
December 31, 2018, revealed the following fund items:
Currency and coins P3,000
Supplies 2,400
Transportation 100
IOUs 4,000 9500
9. Erroneous bank credit 11,000
10. Outstanding checks (including a certified check of P10,000) 39,400
1. What is the principal amount of the note collected by bank in December?
2. What is the adjusted cash in bank balance at December 31, 2018?
3. The cost of checkbook is -
4. What is the amount of petty cash shortage at December 31, 2018?
5. What is the adjusted petty cash balance?

30
Summary

In a nutshell, bank reconciliation problems is expressed in the following:

BANK
Unadjusted balance xx
Deposit in Transit / Unrecorded collections xx
Outstanding checks (excluding certified checks) (xx)
Bank errors xx (xx)
Adjusted balance xx*

Unadjusted balance xx
Unrecorded bank credits (note collection, customer
payments to the bank, loan proceeds) xx
Unrecorded bank debits (BSC, NSF, note/loan
payments directly thru bank) (xx)
Book errors xx (xx)
Adjusted balance xx

References

Cabrera, M.B., & Cabrera, G.B. (2018). Reviewer in Auditing Problems. Manila. manila
Accounting Bookstores.
Empleo, P.M. (2018) . Practical Auditing.
Espenilla. et. al. (2017). Auditing Problems Reviewer. ReSA. Sampaloc, Manila.
Roque, G. (2018). CPA Examination Reviewer: Auditing Problems, CM Recto Avenue,
Manila, Philippines. GIC Enterprises & Co., Inc.

31
 MODULE 3

Audit of Receivables 1

Introduction

Auditing receivables is important because it sheds light upon the status of a business
’ incoming cash. In addition to validating financial records, the outcomes presented on the
auditing reports allows checking of unsent invoices, and whether customers pay their invoices
on time. In this section, we will look at the audit objectives and procedures involved in the
audit of receivables and we will solve CPA board exam-type problems.

Learning Outcomes

After completing the module, the student should be able to:

1. Determine the audit objectives and procedures involved in the audit of receivables.

2. Solve audit problems on receivables and related accounts.

3. Construct a working paper for solving problems involving receivables and related
accounts.

Lesson 1. Audit Objectives (Roque, 2018)

The objectives of audit of recievables are to :

1. prove that receivables represent valid claims against customers and other parties and have
been properly recorded.

32
2. determine the related allowance for doubtful accounts, returns and allowances, and
discounts are reasonably adequate.
3. attest that receivables are properly described.
4. verify that disclosures with respect to the accounts are adequate .

Lesson 2. Audit Procedures (Roque, 2018)

1. Obtain a list of aged accounts receivable balances from the subsidiary ledger, and:
a) Foot and cross-foot the list.
b) Check if the list reconciles with the general ledger control account.
c) Trace individual balances to the subsidiary ledger.
d) Test the accuracy of the aging.
e) Adjust non-trade accounts erroneously included in customers' accounts.
f) Investigate and reclassify significant credit balances.

2. Test accuracy of balances appearing in the subsidiary ledger

3. Confirm accuracy of individual balances by direct communication with customers.

a) Investigate exceptions reported by customers and discuss with appropriate officer for
proper disposal.
b) Send a second request for positive confirmation requests without any replies from
customers.
c) If the second request does not produce a reply from the customer, perform extended
procedures, like:
i. Reviewing collections after year-end.
ii. Checking supporting documents.
iii. Discussing the account with appropriate officer.
d) Discuss with appropriate officer, confirmation requests returned by the post office
and perform
e) Prepare a summary of confirmation results. extended procedures.
4. Review correspondence with customers for possible adjustments.

5. Test propriety of cutoff:

33
 a) Examine sales recorded and shipments made a week before and after the end of the
reporting period and ascertain whether the sales were recorded in the proper period.
b) Investigate large amounts of sales returned shortly after the end of the reporting
period.

6. Perform analytical procedures, like:

a) Gross profit ratio
b) Accounts receivable turnover
c) Ratio of accounts written off to sales or balance of accounts receivable
d) Compare with prior year and industry averages

7. Review individual balances and age of accounts with appropriate officer, and:
a) Determine accounts that should be written off.
b) Determine adequacy of allowance for doubtful accounts.

8. Obtain analyses of significant other receivables.

9. Ascertain whether some receivables are pledged, factored, discounted, or assigned.

10. Determine propriety of financial statement presentation and adequacy of disclosures.

11. Obtain receivable representation letter from client

Lesson 3. Sample Problem 3-1: Upat Company (Roque, 2018).

The December 31, 2019, statement of financial position of the Upat Company included the
following information:

Accounts Receivable P672,000

Less: Allowance for Credit Loss 42,300 P629,700
Notes Receivable* 65,400
Total Receivables P695,100

34
*The company is contingently liable for discounted notes receivable of P114,000.

During the year ending December 31, 2020, the following transactions occurred:
Sales on credit P2,623,800
Collections of accounts receivable 2,523,000
Accounts receivable written off as uncollectible 41,400
Notes receivable collected 87,000
Customer notes received in payment of accounts receivable 216,000
Notes receivable discounted that were paid at maturity 108,000
Notes receivable discounted that were defaulted, including
interest of P60 and a P15 fee. This amount is expected
to be collected during 2021 6,075
Proceeds from customer notes discounted with recourse
(principal P135,000, accrued interest, P600) 135,225
Collections on accounts previously written off 1,500
Sales returns and allowances (on credit sales) 6,000
Increase in allowance for credit loss 39,357

Based on the preceding information, determine the balances of the accounts at December 31,
2020.

1. Accounts receivable
2. Allowance for credit loss
3. Notes receivable
4. Notes receivable discounted

Answers:
1. P515,475
2. P41757
3. P194,400
4. P135,000

Solutions:

35
Journal entries
1. Accounts Receivable 2,623,800
Sales 2,623,800
2. Cash 2,523,000
Accounts Receivable 2,523,000
3. Allowance for credit loss 41,400
Accounts receivable 41,400
4. Cash 87,000
Notes Receivable 87,000
5. Notes Receivable 216,000
Accounts Receivable 216,000
6. Notes Receivable discounted 108,000
Notes Receivable 108,000
7. Accounts receivable 6,075
Cash 6,075
Notes Receivable discounted 6,000
Notes receivable 6,000
8. Cash 135,225
Loss on discounting of NR 375
Notes Receivable discounted 135,000
Interest income 600

Proceeds P135,225
CV of note (P135,000 + P600) 135,600
Loss on discounting P375
9. Accounts receivable 1,500
Allowance for credit loss 1,500
Cash 1,500
Accounts receivable 1,500
10. Sales returns and allowances 6,000
Accounts receivable 6,000
11. Expected credit loss (BDE) 39,357
Allowance for credit loss 39,357

36
 AR Allow. For Credit Loss NR NR discounted
Jan 1 P672,000 (P42,300) P179,400 (P114,000)
1 2,623,800
2 (2,523,000)
3 (41,400) 41,400
4 (87,000)
5 (216,000) 216,000
6 (108,000) 108,000
7 6,075 (6,000) 6,000
8 (135,000)
9 1,500 (1,500)
(1,500)
10 (6,000)
11 (39,357)
Dec31 515,475 (41,757) 194,400 (135,000)

Lesson 4. Sample Problem 3-2: Inuyasha Inc. (Roque, 2018).

In relation to your audit of Inuyasha Inc’s accounts receivable you ascertained the
following information:

The general ledger balances of the client’s receivable and related accounts were:
Accounts receivables 3,225,300
Allowance for bad debts (169,000)
Amortized cost 3,056,300

Inuyasha Inc estimates its bad debt losses by aging its accounts receivable, the aging
schedule of accounts receivable at December 31, 2014 is presented below:
Age Amount
Current 1,686,400
1 to 30 days past due 922,000
31 to 60 384,800

37
 61 to 90 153,300
Over 90 78,800

The company normally sells n/30

Furthermore, the company’s uncollectible accounts experience for the past 5 years are
summarized in the schedule that follows:

Year Current 1-30 31-60 61-90 over 90

2013 1% 6% 9% 23% 55%
2012 2% 8% 10% 18% 60%
2011 1% 4% 11% 16% 45%
2010 3% 5% 12% 22% 45%
2009 3% 2% 8% 21% 45%

1. What are the corresponding percentages to be used per age category in computing for
the client’s required allowance for bad debts?
2. The required allowance for bad debts is -
3. The net realizable value of the company’s accounts receivable on December 31, 2014
should be -

Answers:
1. 2%; 5%; 10%; 20%; 50%
2. P188,368
3. P3,036,932

Solutions:
Current 1-30 days 31-60 days 1-90 days More than 90
1% 6% 9% 23% 55%
2% 8% 10% 18% 60%
1% 4% 11% 16% 45%
3% 5% 12% 22% 45%
3% 2% 8% 21% 45%
2% 5% 10% 20% 50%

38
P1,686,400 922,000 384,800 153,300 78,800 P3,225,300
P33,728 46,100 38,480 30,660 39,400 P188,368

Gross Accounts Receivable P3,225,300

Allowance for uncollectible accounts 188,368
Net realizable value 3,036,932

Lesson 5. Sample Problem 3- 3: Rovers Inc. (Roque, 2018)

You are auditing the accounts receivable of Rovers Inc as of December 31, 2014. You
found the following information in the general journal:
Accounts receivable 1,466,720
Less: Allowance for doubtful accounts (46,720)
Accounts receivable net 1,420,000

The accounts receivable subsidiary ledger had the following details:

Customer Invoice date Amount Balance
Gudang 9/12/2014 139,200 139,200
Tisoy 12/12/2014 153,600
12/02/2014 99,200 252,800
Gusoy 11/17/2014 185,120
10/08/2014 176,000 361,120
Naning 12/08/2014 160,000
10/25/2014 44,800
8/20/2014 40,000 244,800
Nanong 9/27/2014 96,000 96,000
Balong 8/20/2014 71,360 71,360
Peejong 12/06/2014 112,000
11/29/2014 169,440 281,440
Total 1,446,720

Additional information:

39
You discovered based on your review of subsequent events that Balong recently went
bankrupt, thus you suggested that the amount receivable from the same shall be written off.
You also discovered that the invoice dated 12/02/2014 has already been settled by Tisoy per
OR number 34675. this amount has been erroneously posted against Gusoy’s subsidiary
ledger as a settlement for an invoice dated 11/05/2014 for the same amount.
The estimated bad debt rates below are based on the company ’ s receivable collection
experience:
Age % of collectibility
0-30 days 98%
31-60 95%
61-90 90%
91-120 80%
Over 120 50%

1. Assuming that there were no other entries to the allowance for doubtful accounts, what is
the correct bad debt expense for the year?
2. What is the correct allowance for bad debt expense for the year ended December 31, 2014?
3. What is the net adjustment to the accounts receivable in general ledger?
4. What is the carrying value of the company’s accounts receivable as of December 31, 2014?
5. What is the necessary adjusting entry to adjust any unlocated difference between the SL
and GL?

Answers:
1. P144,960
2. P120,320
3. P91,360
4. P1,255,040
5. Dr. Sales 20,000 Cr. Accounts Receivable 20,000

Solutions:
Customer Invoice date Amount Dec Nov Oct Sept
Aug and prior
Gudang 9-12 139,200 139,200

40
Tisoy 12-12 153,600 153,600
12-2 99,200 99,200
Gusoy 11-17 185,120 185,120
10-8 176,000 176,000
Naning 12-8 160,000 160,000
10-25 44,800 44,800
8-20 40,000 40,000
Nanong 9-27 96,000 96,000
Balong 8-20 71,360 71,360
Peejong 12-6 112,000 112,000
11-29 169,440 169,440

Total 1,446,720 524,800 354,560 220,800

235,200 111,360

Reconciliation between GL and SL

Per GL Per SL Dec Nov Oct Sept Aug and prior
Unadjusted bal 1,466,720 1,446,720 524,800 354,560 220,800
235,200 111,360
Write-off Balong (71,360) (71,360)
(71,360)
Posting error (99,200) 99,200
Adjusted 1,395,360 1,375,360 425,600 453,760 220,800
235,200 40,000

Lesson 6. Sample Problem 3-4: IYR Company (Roque, 2018)

In the course of your audit of IYR Company’s “Receivables” account as of December 31,
2020, you found out that the account comprised the following items:

Trade accounts receivable P1,550,000

Trade accounts receivable, assigned (proceeds from assignment
amounted to P650,000) 750,000

41
Trade accounts receivable, factored (proceeds from factoring done
on a without-recourse basis amounted to P250,000) 300,000
12% trade notes receivable 200,000
20% trade notes receivable, discounted at 40% upon receipt of the
day note on a without recourse basis 300,000
Trade receivables rendered worthless 50,000
Installments, receivable, normally due 1 year to 2 years 600,000
Customers’ accounts reporting credit balances arising from sales returns 60,000
Advance payments for purchase of merchandise 300,000
Customers’ accounts reporting credit balances arising from
advance payments 40,000
Cash advances to subsidiary 800,000
Claim from insurance company 30,000
Subscription receivable due in 60 days 600,000
Accrued interest receivable 20,000
Deposit on contract bids 500,000
Advances to stockholders (collectible in 2023) 2,000,000

1. How much is the total trade receivables

2. How much is the amount to be presented as “trade and other receivables” under current
assets?
3. How much loss from receivable financing should be recognized in the income statements?

Lesson 7. Sample Problem 3-5: The Mexican Corp. (Roque, 2018)

The Mexican Corp grants its customers 30 days credit. The company uses the allowance
method for its uncollectible accounts receivable. During the year, a monthly debt accrual is
made by multiplying 2% by the amount of credit sales for the month. At the fiscal year-end of
December 31, an aging of accounts receivable schedule is prepared and the allowance for
uncollectible accounts is adjusted accordingly.

42
At the end of 2014 before any audit adjustments, the general ledger accounts showed
balances of account receivable at P1,230,000 and the allowance for bad debt at P106,000.
Account receivable activity for 2014 included the following:
Credit sales P12,800,000
Write offs 82,000

The company ’ s controller prepared the followed aging summary of year-end accounts
receivable:
Age Amount Percent collectible
0-60 days 825,000 98%
61-90 220,000 90%
91-120 50,000 70%
Over 120 128,000 60%

It was ascertained that P40,000 from the over 120 days accounts are absolutely worthless.

1. How much is the unreconciled difference between the general ledger and the subsidiary
ledger balance of accounts receivable and how should it be accounted for?
2. How much is the total bad debt expense?
3. How much is the net realizable value of accounts receivable at December 31, 2014?

Lesson 8. Sample Problem 3-6: Ikebana Company (Roque, 2018)

You are auditing the Accounts Receivable and the related Allowance for credit loss
account of Ikebana Company.
The following data are available:
General Ledger
Accounts Receivable
2018
Dec 31 P424,000

Allowance for Credit Loss

2018 2018
Jul 31 GJ - Write-off P8,000 Jan 1 Bal P10,000
Dec 31 GJ - Provision 24,000

43
 Summary of Aging Schedule
The summary of the subsidiary ledger balances as of December 31, 2018, is shown below:
Debit balances:
Under 1 month P180,000
One to six months 184,000
Over six months 76,000
440,000
Credit balances
AA Co P4,000 - OK; additional billing in January 2019
BB Co 7,000 - Should have been credited to DD Co.*
CC Co 9,000 - Advance on a sales contract
20,000
*Account is in “one to six months” classification.

The customers’ ledger is not in agreement with the accounts receivable control. The client
instructs the auditor to adjust the control to the subsidiary ledger after corrections are made.

It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six
months are expected to require an allowance of 2%. Accounts over six months are analyzed
as follows:
Definitely bad P24,000
Doubtful (estimated to be 50% collectible) 12,000
Apparently good, but slow (estimated to be 90% collectible) 40,000
76,000

1. The adjusted balance of Ikebana’s “1 to 6 months” accounts receivable is -

2. The adjusted balance of Ikebana’s “over 6 months” accounts receivable is -
3. The adjusted accounts receivable balance on December 31, 2018, should be -
4. The required balance of the allowance for credit loss account on December 31, 2018, is -
-
5. The entry to adjust the allowance for credit loss account is -

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 Assessment task 3

You are auditing the accounts receivable and the related allowance for bad debts account
of Sayote Inc. The control account of the aforementioned accounts had the following balances:
Accounts receivable P1,270,000
Less: Allowance for bad debt (78,000)
Net book value 1,192,000

Upon your investigation, you found out the following information:

 The company’s normal sales term is n/30.
 The allowance for bad debt account had the following details in the general ledger:

Allowance for Bad Debts

July 31 Write off
Jan 1 Balance 30,000
24,000
Dec 31 Provision 72,000

The subsidiary ledger balances of the company’s accounts receivables as of December 31,
2014 contained the following information:

Debit balances Credit balances

Under one month 540,000 Kamote Co. 12,000
One to six months 52,000 Kutchay Corp 21,000
Over six months 228,000 Kalachuchi Inc 27,000

Additional info:
 The credit balance with Kamote Co. Was for an overpayment from the customer. The
company delivered additional merchandise to Kamote Co. On January 3, 2015 to cover
such overstatement.

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 The credit balance of Kutchay Corp was due to a posting error, the amount should have
been credited to Kuchara Corp for a 60 day outstanding receivable.

 The credit balance from Kalachuchi Inc was a cash advance for a delivery to be made on
January 15, 2015.

It was estimated that 1 percent of accounts under one month is doubtful of collection while 2
percent of accounts one to six months are expected to require an allowance for doubtful of
collection. The accounts over six months are analyzed as follows:
Definitely uncollectible 72,000
Doubtful (estimated to be 50% collectible) 36,000
Apparently good but slow ( estimated to be 90% collectible) 120,000
Total 228,000

1. What is the entry to adjust any unlocated difference between the control account and the
subsidiary ledger?
2. The adjusted accounts receivable balance on December 31, 2014 should be -
3. The required balance of the allowance for bad debts account on December 31, 2014 is -
4. The entry to adjust the allowance for bad debts account is -

Summary

For aging of accounts receivable problems:

 The aging schedule should be based on and should agree with the subsidiary ledger
 The aging schedule should be adjusted first with all possible adjustments before a
required allowance is computed. Possible adjustments include:
 Adjustment to both the GL and SL (thus to Aging) additional write off of accounts
unrecorded sale/over recorded sale, unrecorded collections credit balance in
accounts receivable (adjusted to advances from customers)
 Adjustment to SL only (no adjusting entry required, but Aging schedule may be
adjusted) sales/collections already recorded in the GL but not yet in the SL posting
errors

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  Adjustments to GL only - will not affect the aging schedule anymore (eg
sales/collections not yet recorded by the GL but already posted to the SL)

 The adjusted balance of the subsidiary ledger shall ultimately be the correct/adjusted
balance of the accounts receivable gross of the required allowance.
 If the general ledger ultimately does not coincide or equal to the subsidiary ledger, an
additional adjustment should be in place to correct the general ledger to equal the
Adjusted Balance of the subsidiary ledger. The adjustment is either debited or credited to
SALES account
 To compute for the Bad Debt Expense for the period, the adjusted balance per
computation is compared to the unadjusted balance (Do not forget to consider write-off
of accounts receivable recoveries of previously written-off accounts and interim bad debt
provisions, if there are any)

References

Cabrera, M.B., & Cabrera, G.B. (2018). Reviewer in Auditing Problems. Manila. manila
Accounting Bookstores.
Empleo, P.M. (2018) . Practical Auditing.
Espenilla. et. al. (2017). Auditing Problems Reviewer. ReSA. Sampaloc, Manila.
Roque, G. (2018). CPA Examination Reviewer: Auditing Problems, CM Recto Avenue,
Manila, Philippines. GIC Enterprises & Co., Inc.

MODULE 4

AUDIT OF RECEIVABLES 2

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 Introduction

This section is a continuation of the previous section on the audit of cash and cash
equivalents. We will now focus on problems involving notes receivables, loans receivables

and financing transactions. The succeeding lessons are solely problem sets that show

auditing procedures on audit of receivables 2.

Learning Outcomes

After completing the module, the student should be able to:

1. Solve audit problems on receivables and related accounts (notes receivables, loans
receivables and receivable financing).

2. Construct a working paper for solving problems involving receivables and related
accounts.

3. Show the step-by-step procedures in audit of receivable computations.

Lesson 1. Sample Problem 4-1: Forever Company (Roque, 2018)

During your audit of Forever Company for the year ended December 31, 2018, you find the
following account.
Notes Receivable
Sept 1 Cornea, 20% due in 3 months Dr. P80,000
Oct 1 Hunk Co, 24%, due in 2 months Dr. 300,000
Oct 1 Discounted Cornea note at 25% Cr. 80,000
Nov 1 Valerie, 24%, due in 13 months Dr. 600,000
Nov 30 Cellular Co, no interest, due in one year Dr. 500,000
Nov 30 Discounted cellular note at 18% Cr. 500,000

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Dec 1 Tictic, 18%, due in 5 months Dr. 900,000
Dec1 O. Reyes, President, 12%, due in 3 months
(for cash loan given to O. Reyes) Dr. 1,200,000

All notes are trade notes unless otherwise specified. The Cornea note was paid on December
1 as per notification received from the bank. The Hunk Co note was dishonored on the due
date but the legal department has assured management of its full collectibility.

The company, with your concurrence, will treat the discounting as a conditional sale of note
receivable.

1. At what amount on the current assets section of the December 31, 2018, statement of
financial position will the notes receivable - trade be carried?
2. What amount of loss on notes receivable discounting should be reported in the 2018 income
statement of the company?
3. Based on the ledger account presented, what amount of interest income should be accrued
at December 31, 2018?

Answers:
1. P1,500,000
2. P90,833
3. P67,500

Solutions:
1. Valerie P600,000
Tictic 900,000
Total notes receivable -trade, Dec 31, 2018 P1,500,000

2. Net proceeds:
Principal P80,000
Interest 4,000
Maturity value P84,000
Discount (80,000 x 20% x 3/12) (3,500) P80,500

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Book value:
Principal P80,000
Accrued interest rec. (80,000 x 20% x 1/12) 1,333 81,333
Loss on discounting of Cornea note P833

Principal/ Maturity value P500,000

Discount (500,000 x 18% x 1 year) (90,000)
Net proceeds 410,000
Book value 500,000
Loss on discounting of Cellular note P90,000

Total loss on discounting (P833 + P90,000) P90,833

3. Hunk (P300,000 x 24% x 3/12) P18,000

Valerie (P600,000 x 24% x 2/12) 24,000
Tictic (P900,000 x 18% x 1/12) 13,500
O. Reyes (1,200,000 x 12% x 1/12) 12,000
Total accrued interest receivable 67,500

Lesson 2. Sample Problem 2 : Bunsoy Company (Roque, 2018)

The Notes Receivable account of BUNSOY CO. has a debit balance of P239,200 on
December 31, 2018. There was no balance at the beginning of the year. Your analysis of the
account reveals the following:

1. Notes amounting to P845,000 were received from customers during the year.
2. Notes of P416,000 were collected on due dates and notes amounting to P221,000 were
discounted at the Aggressive Bank The Notes Receivable account was credited for the notes
discounted.
3. Of the P221,000 notes discounted, P104,000 was paid on maturity date while a note for
P31,200 was dishonored and was charged back to Notes Receivable account.
4. Cash of P33,000 was received as partial payment on notes not yet due. The amount
received was credited to Liability on Partial Payments account.

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5. A note for P50,000 was pledged as collateral for a bank loan.
6. Included in the company's cash account balance is a three-month note from an officer
amounting to P8,000 which is over a month past due.

Assuming that Bunsoy Co. will use a Notes Receivable Discounted account, the adjusted
balance of the Notes Receivable account on December 31, 2018, is -

Answer: P260,800

Solution:
Unadjusted balance (P845,000 - P416,000 - P221,000 + P31,200) P239,200
Partial collection recorded as a liability (33,000)
Notes receivable discounted still outstanding
(P221,000 - P104,000 - P31,200) 85,800
Dishonored note (31,200)
Adjusted balance P260,800

Lesson 3. Sample Problem 4-3: Visage Corp. (Roque, 2018)

Visage Corp had the following receivable financing transactions during the year:

On March 1, 2020, Visage Corp factored P500,000 of its accounts receivables to BPI. As
of the date of factoring, it was ascertained that P20,000 of the accounts receivable is doubtful
of collection. BPI advanced P350,000 cash to Visage Corp and withheld P50,000 as factors
holdback (to cover future sales discount and sales returns and allowances). the company
incurred P10,000 direct transaction costs (legal fees and other professional fees) related to
the factoring. The factoring was done on a without-recourse basis, thus transferring all
significant risks and rewards associated to the receivable to BPI.

On May 1, 2020, Visage Corp assigned P800,000 of its outstanding accounts receivable
to BPI in consideration of aP500,000, 24% loan. BPI charged the company 2% of the
accounts assigned as service charge. By the end of May. Visage Corp collected P200,000
cash from the assigned accounts net of a P5,000 sales discount. By the end of June. Visage

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Corp collected another P150,000 from the assigned accounts after P4,000 sales discount.
The company accepted merchandise originally invoiced at P30,000 as sales returns and
wrote-off P20,000 of the assigned accounts as worthless. It was agreed between parties that
monthly collections shall be remitted to the bank as partial payment of the loan and interest.

On July 1, 2020, Visage Corp accepted from a customer a 6-month P600,0000, 12% notes
receivable for the sale of merchandise. On October 31, 2020, Visage Corp discounted the
note to BPI at a discount rate of 10%. the discounting was done on a without recourse bases,
thus transferring all significant risks and rewards associated to the receivable to BPI.

1. How much should be reported as gain/loss in the income statement on the transfer of
receivables on the factoring of receivable on March 1?
2. How much should be reported as gain/loss in the income statement on the transfer of
receivables on the assignment of receivable on May 1?
3. What is the carrying value of the accounts receivable-assigned as of June 30?
4. What is the carrying value of the loans payable related to the accounts receivable assigned
as of June 30?
5. How much should be reported as gain/loss in the income statement on the transfer of
receivables on the discounting of the note receivable on July 1?

Answers:
1. P90,000
2. Assignment is only a loan transaction, thus there is no transfer of receivables.
3. P391,000
4. P166,200
5. P1,400

Solutions:
1. Net cash proceeds from factoring (P350,000 - P10,000) P340,000
Factor’s holdback 50,000
Net sales price of AR factored 390,000
Carrying value of AR (480,000)
Loss from factoring (90,000)

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3 .Accounts Receivable assigned P800,000
May collection with sales discount (P200,000 + P5,000) (205,000)
June collection with sales discount (150,000 + P4,000) (154,000)
Sales returns (30,000)
Accounts written-of as worthless (20,000)
Accounts receivable - assigned - June 30 391,000

4. Payment Interest Principal Balance

Loans payable, May 1 (Bal x 24% x 1/12) 500,000
May 31 remittance 200,000 10,000 190,000 310,000
June 31 remittance 150,000 6,200 143,800 166,200

5 .Proceeds from discounting** P625,400

Less: Carrying value of Notes (600,000)
Interest rec. up to Oct 31 (600,000 x 12% x 4/12) (24,000)
Gain on discounting 1,400

Maturity value
Principal amount 600,000
Interest (600,000 x 12% x 6/12) 36,000 636,000
Discount (P636,000 x 10% x 2/12) (10,000)
Proceeds from discounting 625,000**

Lesson 4. Sample Problem 4- 4: Yza Inc. (Roque, 2018)

On January 1, 2014, YZA Inc gave a loan to ABC Corp amounting to P1,000,000 and received
a three-year 6% note. The note calls for annual interest to be paid each December 31. the
company incurred origination costs amounting to ___. The company charged P80,000 to ABC
as origination fees. As a result, the yield on the loan was at 8%.

At December 31, 2015, based on ABC’s financial crisis YZA was not able to collect the 2015
interest and that only 600,000 of the principal due December 31, 2016 will be collected. The

53
P600,000 principal is expected to be collected in two equal installments on December 31,
2016 and December 31, 2018.

1. What is the origination cost incurred by YZA on January 1, 2014 in relation to the loans
receivable?
2. What is the impairment loss to be recognized in 2015?
3. What is the correct carrying value of the loans receivable from ABC on December 31, 2015?

Lesson 5. Special Problem 4-5: Isaiah Company (Roque, 2018)

On December 31, 2013, ISAIAH Company, a financing institution lent P4,000,000 to PSALMS
Corp due 3 years after. The loan is supported by an 8% note receivable. Transaction costs
incurred to originate the loan amounted to P248,000. P374,000 was chargeable to PSALMS
as origination fees. Interest on the loan are collectible at the end of each year. The yield rate
on the loan is 9.25%

ISAIAH was able to collect interest as it became due at the end of 2014. During 2015,
however, due to PSALMS Corporation’s business deterioration and due to political instability
and faltering global economy, the company was not able to collect amounts due at the end of
2015. after reviewing all available evidence at December 31, 2015, ISAIAH Company
determined that it was probable that PSALMS would pay back only P3,400,000 collectible as
follows:
December 31, 2017 1,400,000
December 31, 2018 1,000,000
December 31, 2019 600,000
December 31, 2020 400,000

As of December 31, 2015, the prevailing rate of interest for all debt instruments is 14%

1. What is the carrying value of the loans receivables as of December 31, 2014?
2. What is the impairment loss to be recognized in the 2015 statement of comprehensive
income?

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3. What is the interest income to be recognized in the 2017 statement of comprehensive
income?
4. What is the correct carrying value of the loans receivable as of December 31, 2017?

Assessment Task 4

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

1. On January 1, 2018, Waling-waling Co sells its equipment with a carrying value of

P160,000. the company receives a non-interest-beaing note due in 3 years with a face amount
of P200,000. there is no established market value for the equipment. The prevailing interest
rate for a note of this type is 12%.
The following are the present value factors of 1 at 12%:
Present value of 1 for 3 periods 0.71178
Present value of an ordinary annuity of 1 for 3 periods 2.40183

1. What is the gain or loss to be recognized on the sale of the equipment?

2. What is the discount on note receivable on January 1, 2018?
3. What is the discount amortization at the end of the third year? (using effective interest
method)?

2. On January 2, 2018, a tract of land that originally cost P800,000 was sold by Vietnam Rose
Company. The Company received a P1,200,000 note as payment. It bears interest rate of 4%
and is payable in 3 annual installments of P400,000 plus interest on the outstanding balance.
The prevailing rate on interest for a note of this type is 10%.
The present value table shows the following present value factors of 1at 10%:
Present value factor of 1 for 3 periods 0.75132
Present value factor of 1 for 2 periods 0.82645
Present value factor of 1 for 1 period 0.90909
Present value of an ordinary annuity of 1 for 3 periods 2.48685

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 1. What amount of gain on sales should be recognized on January 2, 2018?
2. How much interest income should be reported for 2018?

3 .The notes receivable account of Caimito Inc consisted of the following:

 60-day note of P10,000 dated may 15 with a 9% interest rate discounted at the bank on
June 8 at 12%.
 120-day note of P100,000 (face amount) dated October 1 with no stated interest rate and
a market rate of 9% interest, discounted at the bank on November 30 at 12%. This note
was received from the sale of equipment,
Determine the proceeds from discounting of notes receivable.

Summary

For loans receivable problems:

Initial measurement
 Initial measurement of loans receivable shall be at fair market value, which shall be the
net initial investment or the net cash given up on the loan transaction. More specifically,
the net initial investment shall be
Principal amount of the loan x
Add Origination costs x
Less Origination fees x
FMV of the loan/Initial investment x
 Origination costs are costs that are directly attributed to the loan transaction such as
brokers fees and commissions, professional fees (eg to lawyers for drafting debt
agreements or to accountants for assessment of any asset collateral on the loan)
 Origination fees are origination costs chargeable to the debtor as per the debt agreement
It can be an amount higher or lower than the actual origination cost incurred

Balance sheet measurement

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 Loans receivable shall be measured at the balance sheet date at amortized cost, which
shall be Initial amount recognized/FMV at initial recognition x
Less: Principal collections (x)
Less Amortization of premium on loan or x
Add Amortization of discount on loan (x)
Less: Impairment loss* if any (x)
Amortized cost x

*Impairment loss of loans receivable

Carrying value of the Loans and Receivable (include accrued interest as a general
rule) x
Less: Present value of expected cash to be recovered using the ORIGINAL
EFFECTIVE INTEREST RATE (x)
Impairment Loss/Bad Debt Expense x

References
Cabrera, M.B., & Cabrera, G.B. (2018). Reviewer in Auditing Problems. Manila. manila
Accounting Bookstores.
Empleo, P.M. (2018) . Practical Auditing.
Espenilla. et. al. (2017). Auditing Problems Reviewer. ReSA. Sampaloc, Manila.
Roque, G. (2018). CPA Examination Reviewer: Auditing Problems, CM Recto Avenue,
Manila, Philippines. GIC Enterprises & Co., Inc.

57