Comprehensive Illustrative Case Analysis:

The balance sheet of Wayne Corporation reported the following long-term receivables as of December
31,2019:
Note receivable from sale of plant P9,000,000
Note receivable from officer 2,400,000
In connection with your audit, you were able to gather the following transactions during 2020 and other
information pertaining to the company's long-term receivables:
a. The note receivable from sale of plant bears interest at 10% per annum. The note is payable in 3
annual installments of P3,000,000 plus interest on the unpaid balance every May 1. The initial principal
and interest payment was made on May 1, 2020.
b. The note receivable from officer is dated December 31, 2019, earns interest at 11% per annum, and is
due on December 31, 2022. The interest is collectible every year at December 31. The 2020 interest was
received on December 31,2020.
c. The corporation sold a piece of equipment to Rihanna, Inc. on April 1, 2020, in exchange for
P1,200,000 non-interest-bearing note due on April 1, 2022. The note had no ready market, and there
was no established exchange price for the equipment. The prevailing interest rate for a note of this type
at April 1, 2020, was at 13%.
d. A tract of land was sold by the corporation to Khalifa Co. on July 1, 2020,for P6,000,000 under an
installment sale contract. Khalifa Co. signed a 4-year 12% note for P4,000,000 on July 1, 2020, in addition
to the down payment of P2,000,000. The equal annual payments of principal and interest on the note
will be P1,300,500 payable on July 1,2021, 2022,2023, and 2024. The land had an established cash price
of P6,000,000, and it's cost to the corporation was P4,000,000.The collection of the installments on this
note is reasonably assured.

Your task is to prepare an analysis and working paper to determine the reasonableness of the
balances of the note receivable and related accounts. Your working paper will help to determine the
following:
1. How much of the note receivables is presented among “trade and other receivables" under current
asset section of the December 31,2020 statement of financial position?
2. How much of the note receivable is presented under non-current asset section of the December 31,
2020 statement of financial position?
3. How much should be reported as accrued interest income in the line item “trade and other
receivables" as of December 31,2020?
4. How much is the correct amount of interest income reported in 2020 statement of comprehensive
income?

Audit analysis:
1. The note receivable from sale of plant is reported as current for amount due within one year after
reporting period and non-current for the amount due for more than one year. Hence, the balance of
P6,000,000(P9,000,000-P3,000,000, the date of the note is 2019 and the initial payment to principal
was made in 2020) is reported as P3,000,000 current and P3,000,000 non-current. Also, the related
interest income is recognized for the whole year. The interest income for the first four months is
based on P9,000,000 principal amount which is received on May 1, 2020 while the remaining eight
months will be receive next year but is accrued at year end based on outstanding balance of
 P6,000,000. The total interest income during the period in this note is P700,000, that is (9M x 10% x
4/12) plus (6M x 10% x 8/12).
2. The note receivable from officer is reported as non-current since it is due for more than one year. The
related interest income received at year end is recognized during the period, P264,000(2.4Mx11%).

3. The carrying value (P1,031,404) of the note receivable from sale of equipment is reported as non-
current in the financial statement since it is due for more than one year. However, the note is a
noninterest- bearing note and shall be discounted using the effective interest when the note was
received. No interest is to be received until maturity but interest income is recognized up to the
extent of period earned using the effective interest method. The interest income is based on
effective interest. In 2020, the interest income on this note is P91,628. The amortization table using
effective interest method is presented below:
Note from Rihanna:
PV of note (1,200,000 x 0.783147) P 939,776
Date EI(13%) CV
4/1/2020 939,776
12/31/2020 91,628 1,031,404

4. The note receivable from sale of land is reported as current and non-current in the financial
statement. The amount due within one year at end of the period is reported under current which is
the amount due on principal. Total payment of P1,300,500 is composed of payment for both principal
and interest, the amount of interest is deducted to arrive at amount of principal currently due. While
interest is recognized to the extent of period earned during the period which is 6 months as of
December 31,2020, the amount of interest income recognized on this note in2020 is P240,000 (4M x
12% x 6/12).
Note from Khalifa:
Annual payment of principal and interest P1,300,500
Less: Interest (4M x12%) 480,000
Current due to principal P820,500

5. The audit working paper showing the summary of current and non-current portion of the note
receivable is shown below:
Current Non- current
Note receivable from sale of plant P3,000,000 P3,000,000
Note receivable from officer 2,400,000
Note receivable from sale of equipment 1,031,404
Note receivable from sale of land 820,500 3,179,500
Total P3,820,500 P9,610,904

6.The audit working paper showing the summary of accrued interest and interest income in 2020is
shown below:
Accrued Int. Income
Note receivable from sale of plant
9M x 10%x 4/12 P300,000
 6M x 10% x 8/12 P400,000 400,000
Note receivable from officer
2.4Mx11% 264,000
Note receivable from sale of equipment 91,628
Note receivable from sale of land
4M x 12% x 6/12 240,000 240,000
Total P640,000 P1,295,628

AUDIT OF RECEIVABLES Questions:

1. Negative confirmations of accounts receivable is less effective than
positive confirmation of accounts receivable because
a. A majority of recipients usually lack the willingness to respond objectively.
b. Some recipients may report incorrect balances that require extensive
follow-up.
c. The auditor cannot infer that all non-respondents have verified their
account information.
d. Negative confirmations do not produce evidence that is statistically
quantifiable.

2. To reduce the risks associated with accepting fax responses to request for
confirmation of accounts receivable, an auditor most likely would
a. Examine the shipping documents that provide evidence for the existence
assertion.
b. Verify the sources and contents of the faxes in telephone calls to the
senders.
c. Consider faxes to the non-responses and evaluate them as unadjusted
differences.
d. Inspect the faxes for forgeries or alterations and consider them to be
acceptable if none are noted.

3. An auditor confirms a representative number of open accounts receivable

as of December 31 and investigates respondents’ exceptions and comments.
By this procedure, the auditor is most likely to learn of which of the
following?
a. One of the cashiers has been covering a personal embezzlement by
lapping.
b. One of the sales clerks has not been preparing charge slips for credit sales
to family and friends.
c. One of the computer processing control has been removing all sales
invoices applicable to this account from the data file.
d. The credit manager has misappropriated remittances from customers
whose accounts have been written off.
4. An auditor who has confirmed accounts receivable may discover that the
sales journal was held open past year-end if
a. Positive confirmations sent to debtors are not returned
b. Negative confirmations sent to debtors are not returned
c. Most of the returned negative confirmations indicate that the debtor owes
a larger balance that the amount being confirmed.
d. Most of the returned positive confirmations indicate that the debtor owes
a smaller balance than the amount being confirmed.

5. During the process of confirming accounts receivable as of December 31,

2005 a positive confirmation was returned indicating the “balance owed as
of December 31, 2018 was paid on January 9, 2019”. The auditor will most
likely
a. Determine whether there were any changes in the account between
January 1 and January 9, 2019.
b. Determine whether a customary trade discount was taken by the
customer.
c. Reconfirm the zero balances as of January 10, 2019.
d. Verify that the amount was received.

6. Confirmation of accounts receivable is a generally accepted auditing

procedure. The presumption that an auditor will confirm accounts receivable
is not overcome if
a. Based on prior’s years’ audit experience response rates will be
inadequate.
b. Based on experience with similar engagements, responses are expected
to be unreliable.
c. The accounts receivable are immaterial.
d. The combined assessed level of inherent and control risk is high
CBADDD
7. A company has computerized sales and cash receipts journals. The
computer programs for these journals have been properly debugged. The
auditor discovered that the total of the accounts receivables subsidiary
accounts differs materially from the accounts receivable control account.
This discrepancy could indicate
a. Credit memoranda being improperly recorded.
b. Lapping of receivables
c. Receivables not being properly aged.
d. Statements being intercepted prior to mailing.

8. Which of the following procedures would an auditor most likely perform for
year-end accounts receivable confirmations when the auditor did not receive
replies to second requests? a. Review the cash receipts journal for the month
prior to year-end.
b. Intensify the study of internal control concerning the revenue cycle.
c. Increase the assessed level of detection risk for the existence assertion
d. Inspect the shipping records documenting the merchandise sold to the
debtors.

9. Which of the following is the greatest drawback of using subsequent

collections evidenced only by a deposit slip as an alternative procedure when
responses to positive accounts receivable confirmations are not received?
a. Checking of subsequent collections can never be used as an alternative
auditing procedure.
b. By examining a deposit slip only, the auditor does not know whether the
payment is for the receivable at the balance sheet date or a subsequent
transaction.
c. A deposit slip is not received directly by the auditor.
d. A customer may not have made a payment on a timely basis.

10. The CPA learns that collections of accounts receivable during the last 10
days of December were not recorded. The effect will be to
a. Leave both working capital and the current ratio unchanged at December
31.
b. Overstate both working capital and the current ratio at December 31.
c. Overstate working capital with no effect on the current ratio at December
31.
d. Overstate the current ratio with no effect on working capital at December
31.

11 . All of the following are examples of substantive tests to verify valuation

of net accounts receivable except the
a. Re-computation of the allowance for bad debts.
b. Inspection of accounts for current versus non-current status in the
statement of financial position.
c. Inspection of the aging schedule and credit records of past due accounts.
d. Comparison of the allowance for bad debts with past records.

12. Once a CPA has determined that the accounts receivable have increased
because of slow collections in a tight money environment, the CPA is likely to
a. Increase the balance in the allowance for bad debts account
b. Review the going concern ramifications.
c. Review the credit and collection policy.
d. Expand tests of collectibility.

13. An auditor reconciles the total of the accounts receivables subsidiary

ledger to the general ledger control account as of October 31. By this
procedure, the auditor is most likely to learn of which of the following?
a. An October invoice was improperly computed.
b. An October check from a customer was posted in error to the account of
another customer with a similar name.
c. An opening balance is a subsidiary ledger account was improperly carried
forward from the previous accounting period
d. Double posting of an October check from a customer
ADBABDC

MULTIPLE CHOICE AUDIT OF RECEIVABLES

1.To reduce the risks associated with accepting fax responses to request for
confirmation of accounts receivable, an auditor MOST likely would:
a. Examine the shipping documents that provide evidence for the existence
assertion.
b. Verify the sources and contents of the faxes in telephone calls to the
senders.
c. Consider faxes to the non-responses and evaluate them as unadjusted
differences.
d. Inspect the faxes for forgeries or alterations and consider them to be
acceptable if none are noted.

2. An auditor confirms a representative number of open accounts receivable

as of December 31 and investigates respondents’ exceptions and comments.
By this procedure, the auditor is MOST likely to learn of which of the
following?
a. One of the cashiers has been covering personal embezzlement by lapping.
b. One of the sales clerks has not been preparing charge slips for credit sales
to family and friends.
c. One of the computer processing control has been removing all sales
invoices applicable to this account from the data file.
d. The credit manager has misappropriated remittances from customers
whose accounts have been written off.

3. An auditor who has confirmed accounts receivable may discover that the
sales journal was held open past year-end if:
a. Positive confirmations sent to debtors are not returned
b. Negative confirmations sent to debtors are not returned
c. Most of the returned negative confirmations indicate that the debtor owes
a larger balance than the amount being confirmed.
d. Most of the returned positive confirmations indicate that the debtor owes
a smaller balance than the amount being confirmed.

4.During the process of confirming accounts receivable as of December 31,

2018 a positive confirmation was returned indicating the “balance owed as
of December 31, 2018 was paid on January 9, 2019”. The auditor will MOST
likely:
a. Determine whether there were any changes in the account between
January 1 and January 9, 2019.
b. Determine whether a customary trade discount was taken by the
customer.
c. Reconfirm the zero balances as of January 10, 2019.
d. Verify that the amount was received.

5. A company has computerized sales and cash receipts journals. The

computer programs for these journals have been properly debugged. The
auditor discovered that the total of the accounts receivables subsidiary
accounts differs materially from the accounts receivable control account.
This discrepancy could indicate
a. Credit memoranda being improperly recorded.
b. Lapping of receivables
c. Receivables not being properly aged.
d. Statements being intercepted prior to mailing.

6. Which of the following procedures would an auditor MOST likely perform

for year-end accounts receivable confirmations when the auditor did not
receive replies to second requests? a. Review the cash receipts journal for
the month prior to year-end.
b. Intensify the study of internal control concerning the revenue cycle.
c. Increase the assessed level of detection risk for the existence assertion
d. Inspect the shipping records documenting the merchandise sold to the
debtors.

7. Which of the following is the greatest drawback of using subsequent

collections evidenced only by a deposit slip as an alternative procedure when
responses to positive accounts receivable confirmations are not received?
a. Checking of subsequent collections can never be used as an alternative
auditing procedure.
b. By examining a deposit slip only, the auditor does not know whether the
payment is for the receivable at the balance sheet date or a subsequent
transaction.
c. A deposit slip is not received directly by the auditor.
d. A customer may not have made a payment on a timely basis.

8. The CPA learns that collections of accounts receivable during the last 10
days of December were not recorded. The effect will be to:
a. Leave both working capital and the current ratio unchanged at December
31.
b. Overstate both working capital and the current ratio at December 31.
c. Overstate working capital with no effect on the current ratio at December
31.
d. Overstate the current ratio with no effect on working capital at December
31.

9. All of the following are examples of substantive tests to verify valuation of

net accounts receivable, EXCEPT:
a. Re-computation of the allowance for bad debts.
b. Inspection of accounts for current versus non-current status in the
statement of financial position.
c. Inspection of the aging schedule and credit records of past due accounts.
d. Comparison of the allowance for bad debts with past records.

10. An auditor reconciles the total of the accounts receivables subsidiary

ledger to the general ledger control account as of October 31. By this
procedure, the auditor is MOST likely to learn of: a. An October invoice was
improperly computed.
b. An October check from a customer was posted in error to the account of
another customer with a similar name.
c. An opening balance is a subsidiary ledger account was improperly carried
forward from the previous accounting period.
d. An account balance is past due and should be written off.

11. Which of the following forms of evidence represents the most competent
evidence that a receivable actually exists?
a. A positive confirmation b. A sales invoice c. A receiving report
d. A bill of lading

12. Which of the following audit objectives is not served by confirming

customers' accounts receivable?
a. Sales and accounts receivable cutoff.
b. Completeness of customers represented in the accounts receivable trial
balance.
c. Valuation of accounts receivable as of period end.
d. Existence of customers represented in the accounts receivable trial
balance.

13. Which of the following procedures would an auditor MOST likely perform
for year-end accounts receivable confirmations when the auditor did not
receive replies to second requests? a. Review the cash receipts journal for
the month prior to year-end.
b. Inspect the shipping records documenti1rig the merchandise sold to the
debtors.
c. Intensify the study of internal control concerning the revenue cycle.
d. Increase the assessed level of detection risk for the existence assertion

14. An auditor most likely would review an entity's periodic accounting for
the numerical sequence of shipping documents and invoices to support
management's financial statement assertion of:
a. Valuation b. Completeness c. Existence or occurrence
d. Rights and obligation
BADDA DBABC ABBB