AUDIT OF RECEIVABLES

PROBLEM 1: COMPOSITION/RECOGNITION OF ACCOUNTS RECEIVABLE

On December 31, 2013, the accounts receivable of the ARA Company amounted to P196,500, and consisted of
the following items:
Accounts receivable, trade, of which there are P3,000 of known worthless
accounts. Of the remaining accounts, P5,000 may be estimated as being
doubtful of collection 130,000
Accounts receivable, trade, credit balances (3,500)
Accounts receivable, consignments (cost P10,000) 15,000
Accounts receivable consisting of subscriptions to capital stock. This is
the balance due on 200 shares of capital stock subscribed for at par
P100) and payable on demand 13,000
Advances to traveling salesmen 5,000
Kenny, plant superintendent (This is the balance due on a loan of P3,000
which is being paid by deductions of P100 monthly from Kenny’s salary 2,000
Advances to Lucy Sales Company 25,000
Advances to ARA Engineering Company 15,000
These two advances to subsidiary companies are not expected to be paid
during the coming year.
Allowance for doubtful accounts (5,000)

Required: Based on your audit, determine the adjusted balance of Accounts Receivable.

PROBLEM 2
Lilia Garcia Inc. grants its customers 45 days credit. The company uses the allowance method for its uncollectible
accounts receivable. During the year, a monthly bad debt accrual is made by multiplying 2% times 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.

At the end of 2014, accounts receivable were P2,500,000 and the allowance accounts had a credit balance of
P212,000. Accounts receivable activity for 2015 was as follows:

Credit Sales P7,600,000

Write-offs 164,000
Collections ?

The company’s controller prepared the following aging summary of year-end accounts receivable:
Age Group Amount Percent uncollectible
0-60 days 1,650,000 2%
61-90 days 440,000 10%
91-120 days 100,000 30%
Over 120 days 256,000 40%

Questions:
Based on the preceding information, determine the following:
1. Allowance for uncollectible accounts before year-end adjustment
A. P152,000 B. P P200,000 C. P209,400 D. P212,000

2. Required balance in the allowance for uncollectible accounts on December 31, 2015
A. P152,000 B. P P200,000 C. P209,400 D. P212,000

3. Correct bad debt expense for 2015

A. P9,400 B. P142,600 C. P152,000 D. P161,400

4. Net realizable value of accounts receivable at December 31, 2015

A. P2,236,000 B. PP2,246,000 C. P2,284,600 D. P2,446,000

5. Collections from customers during 2015

A. P2,664,000 B. P7,490,000 C. P9,882,000 D. P9,936,000

Prepared by: Erlinda G.Bialno, CPA Aspire greatly; anything less than commitment to excellence becomes an acceptance of mediocrity “ –Bryan Tracy
PROBLEM 3: ALLOWANCE FOR BAD DEBTS
The Prism Corporation grants its customers 30 days’ credit. The company uses the allowance method for its
uncollectible accounts receivable. During the year, a monthly bad 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.

At the end of 2015, accounts receivable were P1,250,000 and the allowance had a credit balance of P106,000.
Accounts receivable activity for 2016 was as follows: Credit sales P3,800,000; write-offs, P82,000; collections -
?.

The company’s controller prepared the following aging summary of year-end accounts receivable:
Age Group Amount Percent Collectible
0-60 days 825,000 98%
61-90 days 220,000 90%
91-120 days 50,000 70%
Over 120 days 128,000 60%
Total 1,223,000

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

1. How much is the total bad debts expense for 2016?

A. P104,700 B. P71,300 C. P4,700 D. P80,700

2. How much is the net realizable value of accounts receivable at December 31, 2016?
A. P1,123,000 B. P1,118,000 C. P1,223,000 D. P1,094,300

PROBLEM 4
During your examination of the 2004 financial statements of the Ringo Company you find that the company does
not provide allowance for doubtful accounts ever since it started operations in 2000. The company’s practice is
to directly write-off as expense doubtful accounts and credit recoveries to income. The company’s contracts are
generally for two years.

Upon your recommendation, the company agreed to change its accounts for 2004 to give effect to doubtful
treatment on the allowance basis. The allowance is to be based on a percentage of sales which is derived from
the experience of prior years. Statistics for 2000 to 2004 are shown as follows:

Year of Sale 2000 2001 2002 2003 2004

Charge Sales 600,000 15,000 1,800,000 1,950,000 1,650,000
Accounts Written off
& Year of Sale
2000 3,300
2001 9,000 6,000
2002 3,000 24,000 7,800
2003 7,200 27,000 9,000
2004 16,200 30,000 8,400
Recoveries & Year
of Sale
2000
2001 600
2002 2,400
2003 3,000
2004 3,600

Accounts receivable at December 31, 2004 were as follows:

From 2003 sales 90,000
From 2004 sales 810,000
Total 900,000

Based on the above and the result of your audit, you are to provide the answer to the following:
1. The average percentage of net doubtful accounts to charge sales that should be used in setting up the 2004
allowance is:
Driven for real excellence! AP by Erlinda G. Bialno
AUDIT OF RECEIVABLES
A. 2.05% B. 2.50% C. 1.90% D. 1.77%

2. How much is the doubtful accounts expense for 2004?

A. P32,850 B. P41,250 C. P43,800 D. P54,600

3. The doubtful accounts expense for 2004 is over(under) stated by

A. P55,950 B. P13,350 C. P(32,850) D. P(41,250)

4. The net realizable value of accounts receivable that should be presented on the December 31, 2004 balance
sheet is:
A. P831,600 B. P853,800 C. P868,650 D. P810,000

5. The adjusting entry necessary to set-up the allowance for doubtful accounts as of December 31, 2004 will
include:
A. A debit to provision for Doubtful Accounts of P13,350
B. A debit to Retained Earnings of P55,950
C. A credit to Bad Debt Recovery of P3,600
D. A credit to Allowance for Doubtful Accounts of P41,250

PROBLEM 5: SALES CUT OFF

You are engaged to perform an audit of the accounts of VANDA for the year ended December 31, 2010, and
have observed the taking of the physical inventory of the company on December 27, 2010. Only merchandise
shipped by VANDA to customers up to and including December 27, 2010 have been removed or excluded 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.
The average gross profit rate is 25% of sales.

The following lists of sales invoices are entered in the sales books for the months of December 2010 and January
2011, respectively
Sales Invoices Date Amount Date Shipped
December 2010 110 12/23/2010 25,000 12/31/2010
111 12/27/2010 18,000 12/27/2010
112 12/30/2010 30,000 1/5/2011
113 12/22/2010 12,000 1/12/2011
114 12/28/2010 16,000 12/29/2010
115 12/3/2010 8,000 12/5/2010
116 12/31/2010 20,000 1/7/2011
117 12/31/2010 14,000 12/31/2010
January 2011 118 12/31/2010 7,500 12/29/2010
119 12/27/2010 11,000 1/4/2011
120 1/12/2011 9,000 1/9/2011
121 1/10/2011 5,000 12/31/2010

Required:
Based on the above and the result of your audit, answer the following:
1. How much sales for the month of January 2011 were erroneously recorded in December 2010?
2. How much sales for the month of December 2010 were erroneously recorded in January 2011?
3. How much is the correct amount of sales for the month ended December 31, 2010?
4. By how much would the December 31, 2010 inventory be misstated, if no adjustments were made for the
above errors?

PROBLEM 6: SALES CUT-OFF

CHANCHANITO AUTO ACCESORRIES sells new parts to auto dealers. The company policy requires that pre-
numbered shipping documents be issued each sale. At the time of pickup or shipment, the shipping clerk writes
the date on the shipping document. The last shipment made in the year ended December 31, 2012 was
recorded on document 3167. Shipments are billed in the order that the billing clerk receives the shipping
documents.

For late December 2012 and early January 2013, shipping documents are billed on sales invoices as follows:
Shipping Doc no Sales Invoice no Shipping Doc no Sales Invoice no

Prepared by: Erlinda G.Bialno, CPA Aspire greatly; anything less than commitment to excellence becomes an acceptance of mediocrity “ –Bryan Tracy
 3163 5332 3168 5328
3164 5326 3169 5329
3165 5327 3170 5333
3166 5330 3171 5335
3167 5331 3172 5334

The December 2012 and January 2013 sales journals have the following information included:
SALES JOURNAL-DECEMBER
Day of Month Sales Invoice No Amount of sale
30 5326 P 72,611
30 5329 191,430
31 5327 41,983
31 5328 62,022
31 5330 4,774

SALES JOURNAL-JANUARY
Day of Month Sales Invoice No Amount of sale
1 5332 P264,131
1 5331 10,639
1 5333 85,206
2 5335 125,050
2 5334 64,658

Required:
1. What is the net overstatement (understatement) of the company’s sales for the year ended December 31,
2012?
2. What is the adjusting journal entry for the above transactions.

PROBLEM 7: AUDIT OF ACCOUNTS RECEIVABLE – CONFIRMATION REPLIES

To substantiate the existence of accounts receivable balances as of December 31, 2014 of COA Company, you
have decided to send confirmation requests to customers. Below is a summary of the confirmation requests to
customers. Below is a summary of the confirmation requests to customers and replies from them together with
the exceptions and audit findings. Gross profit on sales is 20%. The company is using the perpetual inventory
system.
Balance per
Customer Customer's Comments Audit Findings
books

P30,000 was returned on 1/2/15. Correct

Asus 50,000 balance is P20,000. Returned goods were received 1/5/15

Your CM representing price adjustment dated

Apple 10,000 12/29/14 cancels this. The CM was taken up by COA in 2015.

You have overpriced us by P50. Correct price

HP 48,000 should be P100. The complaint is valid
Acer 37,500 We received the goods only on 1/5/15. Term is shipping point. Shipped in 2014.

Balance was offset by our December shipment COA credited accounts payable for P45,000
Samsung 45,000 of raw materials to record purchases. Samsung is a supplier

Based on the above and the result of your audit, answer the following:
1. Compute for the adjustment to accounts receivable. Indicate whether it’s an increase or decrease.

PROBLEM 8: AUDIT OF ACCOUNTS RECEIVABLE

In your audit of Apricot Industries, you noted that the company’s balance sheet shows the accounts receivable
balance at December 31, 2015 as follows:

Accounts receivable 3,600,000

Allowance for doubtful
accounts 72,000

Driven for real excellence! AP by Erlinda G. Bialno

AUDIT OF RECEIVABLES
3,528,000

During 2016, transactions relating to the accounts were as follows:

• Sales on account, P38,400,000.
• Cash received from collection of current receivable totaled P31,360,000, after discount of P640,000 were
allowed for prompt payment.
• Customers’ accounts of P160,000 were ascertained to be worthless and were written off.
• Bad accounts previously written off prior to 2015 amounting to P40,000 were recovered.
• The company decided to provide P184,000 for doubtful accounts by journal entry at the end of the year.
• Accounts receivable of P5,600,000 have been pledged to a local bank or a loan of P3,200,000.
Collections of P1,200,000 were made on these receivables (not included in the collections previously
given) and applied as partial payment to the loan.

Required:
1. The accounts receivable as of December 31, 2016 is
A. P8,680,000 B. P9,840,000 C. P4,240,000 D. P8,640,000

2. The allowance for doubtful accounts as of December 31, 2016 is

A. P 8,000 B. P136,000 C. P184,000 D. P176,000

3. The net realizable value of accounts receivable as of December 31, 2016 is

A. P8,544,000 B. P8,456,000 C. P8,504,000 D. P4,104,000

4. If the receivables are hypothecated against borrowings, the amount of receivables involved should be
A. Disclosed in the statements or notes
B. Excluded from the total receivables, with disclosure
C. Excluded from the total receivables, with no disclosure
D. Excluded from the total receivables and a gain or loss is recognized between the face value and the
amount of the borrowings.

PROBLEM 9: AUDIT OF NOTES RECEIVABLE

Crazy Company reported the following long-term receivable account balances as of December 31, 2012:

Note Receivable from sale of division P 6,750,000

Note Receivable from officer 1,800,000

Transactions during 2013 and other information relating to the company’s long-term receivables were as follows:
1. The P6,750,000 note is dated April 30, 2012, bears interest at 9% and represents the balance of the
consideration received from the sale of the company’s food division to Insane Co. Principal payments of
P2,250,000 plus interests are to be received every April 30 starting 2013. The first principal and interest
payment was made on April 30, 2013. Collection of the note is reasonably assured.

2. The P1,800,000 note receivable is dated December 31, 2012 bearing interest at 8% and is due on
December 31, 2015. The note is due from Joseph Guapo Mendoza, the company president. Interest
payments are due annually every December 31. Interest for the year was paid by the company president.

3. On April 1, 2013, the company sold an equipment to Dear Co for a P600,000 noninterest bearing note due
on April 1, 2015. There was no established exchange price for the equipment and the note had no ready
market value. The prevailing interest rate of interest for a note of this type was 12%. The present value
of 1 for two periods at 12% is 0.797. The equipment had a carrying value of P120,000 at January 1, 2013
and the depreciation for the year should have been P24,000. The collection of the note receivable is
reasonable assured.

4. On July 1, 2013, the company sold a parcel of land to Jimmy Co for P600,000 under an installment sale
contract. Jimmy made a P180,000 down payment on July 1, 2013 and signed a 4-year 11% note for the
balance. The equal annual payments of principal and interest on the note will be P135,375 payable starting
on July 1, 2014, through July 1, 2017. The land could have been sold at an established cash price of
P600,000 with a cost of P450,000. The collection on the note is reasonably assured.

REQUIRED:
Determine the following:
1. Total long-term receivables as of December 31, 2013.
2. Total current portion of long-term receivables as of December 31, 2013.
Prepared by: Erlinda G.Bialno, CPA Aspire greatly; anything less than commitment to excellence becomes an acceptance of mediocrity “ –Bryan Tracy
 3. Accrued interest receivable at December 31, 2013.

PROBLEM 10: DISCOUNTING AND DISHONORED NOTES RECEIVABLE

On January 16, Sapphire Company accepted a P600,000, 9%, 90-day note from a customer. On February 10,
the note was discounted at 12%
Required:
1. Compute the cash proceeds from discounting and the notes receivable balance assuming:
a. The note was discounted on a without recourse basis.
b. The note was discounted with recourse and treat the discounting as a conditional sale.
c. The note was discounted with recourse and treat the discounting as a secured borrowing.
2. Assume that on April 16, the maturity date of the note, the maker of the note receivable which is discounted
defaulted from payment and the bank charged Sapphire Company for the maturity value of the note plus a
P5,000 protest fee. How much will be debited to accounts receivable on April 16?

PROBLEM 11: LOAN RECEIVABLE

Lavender Bank granted a loan to a borrower on January 1, 2015. The interest on the loan is 10% payable
annually starting December 31, 2015. The loan matures in three years on December 31, 2017. Data related to
the loan are:
Principal amount 4,000,000
Origination fees charged against the borrower 342,100
Direct origination cost incurred 150,020

Required: Based on the above data, answer the following rounding off present value factors to four decimal
places.
1. The carrying amount of the loan as of January 1, 2015
A. P3,807,920 B. P4,000,000 C. P4,192,080 D. P4,492,120

2. The effective interest rate of the loan

A. 9% B. 10% C. 12% D. 12.19%

3. The interest income to be recognized in 2015

E. P400,000 F. P456,950 G. P464,185 H. P404,291

4. The carrying amount of the loan as of December 31, 2015

A. P3,864,870 B. P3,872,105 C. P4,000,000 D. P4,496,411

5. The current portion of the loan as of December 31, 2015

A. P 0 B. P56,950 C. P63,784 D. P400,000

PROBLEM 12: EXPECTED CREDIT LOSSES

BPI granted a loan to Prague Company amounting to P10,000,000. Using the most recent information available
such as holder specific data, industry data, the credit quality of the borrower and the economic outlook for the
next 12 months, BPI estimates that the instrument has 1% probability of a default occurring in the next 12
months. It further estimates that 20% of the gross carrying amount will be lost if the loan defaults.

Required:
6. Determine what expected credit loss should be recognized.
7. Compute for the amount of expected credit loss.

PROBLEM 13: EXPECTED CREDIT LOSSES

On January 1, 2017, BDO company granted a five-year term loan of P1,000,000 to LeMiz Company. If there
were no possibility of credit losses, the coupon rate that BDO Company would charge the borrower is 5% per
annum. However, because the borrower’s credit rating, BDO Company estimates that there is a possibility the
borrower might default on the payments and the expected credit losses are estimated at P10,000 per year over
the five-year term. Accordingly, BDO Company charges the borrower 6% coupon rate to reflect the yield on the
instrument to include a return to cover those credit losses expected when the loan is first recognized.

Required:
1. Compute for the lifetime expected credit loss.
2. Compute for the 12 month expected credit loss
3. Prepare the journal entry on initial recognition of the loan
4. Prepare the entry assuming there is no significant deterioration of credit risk for the year ended 2017.

Driven for real excellence! AP by Erlinda G. Bialno

AUDIT OF RECEIVABLES
5. Prepare the entry assuming there is a significant deterioration of credit risk for the year ended 2017.

PROBLEM 14: IMPAIRMENT OF LOANS RECEIVABLE

BDO Bank loaned P5,500,000 to Bargain Company on January 1, 2013. The initial loan repayment terms include
a 10% interest rate plus annual principal payments of P1,100,000 on January 1 each year. Bargain made the
required interest payment in 2013 but did not make the P1,100,000 principal payment nor P550,000 interest
payment for 2014. BDO is preparing its annual financial statements on December 31, 2014. Bargain is having
financial difficulty, and BDO has concluded that the loan is impaired.

Analysis of Bargain’s financial condition on December 31, 2014, indicates the principal payments will be
collected, but the collection of interest is unlikely. BDO did not accrue the interest on December 31, 2014.
The projected cash flows are:
December 31, 2015 P 1,750,000
December 31, 2016 2,000,000
December 31, 2017 1,750,000
P 5,500,000

REQUIRED:
1. What is the impairment loss on December 31, 3014?
2. What is the interest income to be reported by BDO Bank in 2015?

PROBLEM 15
1. To test the existence assertion for recorded receivables, an auditor would select a sample from the.
a. Sales orders file.
b. Customer purchase orders.
c. Accounts receivable subsidiary ledger.
d. Shipping documents (bills of lading) file.

2. Which of the following is least likely to be typically considered to be an alternate procedure for handling non
replies to accounts receivable confirmations?
a. Examine bills of lading.
b. Physically examine items sold.
c. Examine correspondence.
d. Examine subsequent cash receipts.

3. Which of the following would be least likely to diminish the validity of evidence obtained through confirmation
of accounts receivable?
a. The confirmations are sent on the client's letterhead.
b. The confirmations are mailed to customers by the internal auditors.
c. The client's mailroom personnel closely monitor and inspect confirmations during mailing.
d. The return address on the envelope used to send the confirmation request is that of the client.

4. When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect
with respect to the auditors' confirmation of receivables?
a. The account balances as of year-end will generally be confirmed.
b. The auditors will in general use blank rather than positive confirmations.
c. The auditors will be required to confirm accounts as of an interim date (during the year under audit) and
as of year-end.
d. Confirmations will not in general be used as the auditor will rely primarily upon support such as vendors'
invoices, purchase orders and receiving reports.

5. Which of the following is not typically considered to be an alternate procedure for handling non replies to
accounts receivable confirmations?
a. Examine sales invoices.
b. Inclusion of the information in the engagement letter.
c. Examine correspondence.
d. Examine any subsequent cash receipts.

6. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal
control over the revenue cycle?
a. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement
of receivables.
b. Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other

Prepared by: Erlinda G.Bialno, CPA Aspire greatly; anything less than commitment to excellence becomes an acceptance of mediocrity “ –Bryan Tracy
 customers' accounts permitting a misappropriation of cash.
c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
d. The failure to prepare shipping documents may lead to an understatement of inventory balances.

7. For effective internal control, the billing function should not be performed by the:
a. Sales department.
b. Accounting department.
c. Finance department.
d. Information Processing department.

8. Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously
been recorded twice?
a. Footing the sales journal.
b. Sending accounts receivable confirmations.
c. Tracing the total sales in the sales journal to the general ledger.
d. Observation of the physical inventory count at year-end.

9. An audit basically consists of having the auditor form an opinion regarding management's financial statement
assertions. The auditor therefore develops general and specific program steps to apply to the accounts and
transactions. In a particular case, s/he might do this by:
a. Tracing sales invoices to shipping documents to tests the completeness of reported sales.
b. Tracing shipping documents to sales invoices to test the occurrence of reported sales.
c. Tracing sales invoices to shipping documents to test the occurrence of reported sales.
d. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

10. After the CPAs have selected particular accounts receivable for confirmation:
a. As a control measure, the CPAs should carefully list the audited values of all of those accounts before
turning the letters over to the client to type and mail.
b. It is important that every account selected that has a material balance ultimately be verified by
confirmation or the application of alternative procedures; immaterial balances never require any follow-up
through alternative procedures.
c. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and
should include a return envelope addressed to the CPA firm.
d. All differences between confirmation replies and book values should be reconciled by the CPAs, rather than
the client.

11. Which of the following manipulations would understate receivables on the financial statements?
a. Understatement of cash sales.
b. Closing the sales journal prior to year-end.
c. Closing the cash receipts journal prior to year-end.
d. Underestimating the allowance for doubtful accounts.

12. You were surprised to note that approximately 95% of returned positive accounts receivable confirmations
indicated that the customers thought that they owed a larger balance than the amount that had been printed
by your client on the confirmation. This might be explained by the fact that:
a. The cash receipts journal was closed before year-end.
b. The cash receipts journal was held open after year-end.
c. There are many unrecorded liabilities.
d. The sales journal was held open after year-end.

13. Which of the following procedures is least likely to help auditors to assess the adequacy of management's
accounting estimate of the allowance for doubtful accounts?
a. Investigate confirmation exceptions for indication of amounts in dispute.
b. Review accounts which have been written off as uncollectible prior to year-end.
c. Investigate credit ratings for large accounts receivable.
d. Discuss with the credit manager the current status of doubtful accounts.

14. To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors:
a. Trace a sample of the bills of lading to sales invoices.
b. Confirm a sample of accounts payable.
c. Review the aging of accounts receivable.
d. Trace a sample of recorded sales to shipping documents.

Driven for real excellence! AP by Erlinda G. Bialno

AUDIT OF RECEIVABLES
15. Which of the following is not true about the auditors' verification of notes receivable?
a. The interest revenue on notes receivable is usually audited by independent computation.
b. Inspecting the notes is sufficient evidence of existence of the notes.
c. The auditors may evaluate the collectability of notes by inspecting credit files.
d. Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash
balances.

16. Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the
following, which combination is it most likely that the auditors will use?
a. The positive form for small balances, and the negative form for large balances.
b. The positive form used for large balances and the negative form for the small balances.
c. The positive form used for trade receivables and the negative form for other receivables.
d. The positive form when controls related to receivables are satisfactory, and the negative form when
controls related to receivables are unsatisfactory.

17. Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good
internal control?
a. Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary
ledger.
b. Posting to the general ledger and approval of additions and terminations relating to the payroll.
c. Custody of unmailed signed checks and maintenance of expense subsidiary ledger.
d. Collection of receipts on account and maintaining accounts receivable records.
18. Johnson is engaged in the audit of a utility which supplies power to a residential community. All accounts
receivable balances are small and internal control is effective. Customers are billed bi-monthly. In order to
determine the validity of the accounts receivable balances at the balance sheet date, Johnson would most
likely:
a. Examine evidence of subsequent cash receipts instead of sending confirmation requests.
b. Send positive confirmation requests.
c. Send negative confirmation requests.
d. Use statistical sampling instead of sending confirmation requests.

19. In your review of ABC Company's financials, you note that Receivables have increased approximately 200%
from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables
were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is
most likely?
a. Fictitious revenues
b. Timing differences
c. Improper asset valuations
d. Improper disclosures

20. Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial
statements for all of the following except:
a. It understates liabilities.
b. It overstates revenues
c. It overstates net income.
d. It overstates assets.

Prepared by: Erlinda G.Bialno, CPA Aspire greatly; anything less than commitment to excellence becomes an acceptance of mediocrity “ –Bryan Tracy