02 AUDIT OF RECEIVABLES AND RECEIPTS CYCLE

Receivables, often referred to as accounts receivable, represent amounts due from customers for goods or services provided on
credit. They are a critical component of an organization's working capital and financial health, and their audit focuses on ensuring
these balances are valid, accurate, and collectible.

It is a financial asset that represents a contractual right to receive cash or another financial asset from another entity. PFRS 15
paragraph 108 provides that a receivable is an entity’s right to consideration that is unconditional. A right to consideration is
unconditional if only the passage of time is required before payment of that consideration is due.

Types of receivables:

a. Trade receivable (current)

• Accounts receivable
• Notes receivable
b. Non-trade receivables (current if will be collected within 12 months after the reporting date)
• Loans to officers and employees
• Advances
• Accrued income other than those arising from trade (e.g. income from dividends, royalties and like)
• Deposits, Guarantees etc.
• Claims from damages and refunds
• Debit balance of creditors' account

RECOGNITION OF RECEIVABLES:

INITIAL MEASUREMENT:
Receivables is a financial asset and recognized simultaneously with the recognition of revenue. The following shall be considered:
a. An entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. (PFRS 15
paragraph 2)
b. An entity shall recognized a financial asst or financial liability in its statement of financial position when and only when
the entity becomes party to the contractual provisions of the instrument (PFRS 9 paragraph 3.1.1)

Short-term receivables with no stated interest rates can be measured initially at transaction price when the effect of
discounting is immaterial.

Trade discount/volume discount/quantity discount – these discounts are deducted form the list price to arrive at the invoice
price and are never recognized.

Cash Discount – This are reduction from invoice price as an inducement for prompt payment. In recording of Cash discounts,
the following method can be used:
1. Gross price method – This method is considered to be more practical than the net method. Sales and receivables are
recorded at the gross amount. Sales discounts taken by customers are debited to the sales discounts account which is
reported as a reduction of sales.
2. Net price method – This method is considered to be theoretically correct as it uses the cash price equivalent. Sales
and receivables are recorded at the net amount and discounts are not taken by customers are to the sales discount
forfeited account.
3. Allowance method – recorded at gross amount and corresponding allowance is recorded for sales discount.

Long-term Notes Receivables- Long-term notes receivables may be classified as interest-bearing and non-interest-bearing.
a. Interest bearing Notes receivable – Shall me measured at fair value which is equal to face value. However,
Interest bearing NR with unrealistic interest rates shall be discounted using the imputed interest rate that
approximates the market rate of interest for the same note.
b. Non-Interest bearing Notes Receivable – discounted to arrive at the fair value or the present value of future
cash flows using the prevailing market rate of interest for the similar receivables.

Loan receivable – Fair value plus transaction cost. The following should be considered:
a. Origination fee – recorded as credit to unearned interest income
b. Direct origination cost – cost incurred in the evaluation of borrowers' financial condition.
c. Indirect origination cost – Shall be accounted as an expense

SUBSEQUENT MEASUREMENT:
Receivables are subsequently measured at amortized cost using the effective interest method. It is the amount at which the
receivable is measured initially minus principal repayments, plus or minus the cumulative amortization of any difference between
the initial amount recognized and the principal maturity minus reduction for impairment.

Short term receivables are subsequently measured at their net realizable value.

Long-term Notes Receivables – measured at amortized cost using the effective interest method.

Loan receivable – measured at amortized cost using the effective interest method. Since loans receivable involve transaction
costs, a new effective rate should be computed through interpolation.
Other Accounting Considerations:

Considering freight charge:

1. FOB Destination
2. FOB Shipping point
3. Freight Collect
4. Freight Prepaid

Accounting for Bad Debts:

1. Direct write-off
2. Allowance Method
a. Percentage of sales
b. Percentage of Accounts receivables
c. Aging of Accounts receivables

Sales Return vs Sales Discount

Sales return is an arrangement of a right of return in which an entity transfers control of a product of a customer and also grants
the customer the right to return the product for various reasons. Sales discount on the other hand is a reduction in the invoice
amount offered by the seller to the customer as an incentive. Under PFRS 15, revenue is measured at transaction price which is
the consideration to which an entity expects to be entitled in exchange for transferring promised goods or services. At initial
recognition, the revenue shall be recognized net of discount.

Revenue would only be recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when the uncertainty associated with the right of return is subsequently resolved.

RECEIVABLE FINANCING

financial arrangement where a business uses its accounts receivable (invoices) as collateral to secure funding. It allows businesses
to access cash quickly by leveraging the payments they are owed by customers, rather than waiting for those customers to pay
their invoices.

Forms of receivable financing

a. Pledging of receivables – receivables in general are used as collateral
b. Assignment of receivable – specific receivables are used as security. The loan is at a specified percentage of the face
value of the collateral and the assigned accounts are segregated from other accounts.
• Non-notification basis – buyer is not informed of the assignment
• Notification basis – buyer is informed of the assignment arrangement and will remit payment directly to the
assignee
c. Factoring of receivables – sale of receivables to a finance company. The factor or buyer assumes the risk of collectivity
and generally hands the billing and collection functions.
• With recourse (Factoring with guarantee)
• Without recourse (without guarantee)
d. Discounting of receivable – sale of notes to a third party. The entity endorses a promissory note to a bank or a financing
company, the latter advancing the maturity value of the note less a charge called a discount.
• With recourse
• Without recourse

1. Audit Objectives for Receivables

The primary objectives of the audit of receivables are:

• Existence: Verify that recorded receivables exist.

• Rights and Obligations: Confirm that the entity has rights to the receivables (e.g., not pledged or factored without
disclosure).
• Completeness: Ensure that all receivables are recorded.
• Valuation and Allocation: Assess whether receivables are stated at their net realizable value (NRV), which includes
evaluating the allowance for doubtful accounts.
• Presentation and Disclosure: Ensure receivables are properly classified and disclosed in the financial statements.

2. Risks and Material Misstatements

Inherent Risks

• Credit Risk: Uncollectible accounts due to poor credit management.

• Revenue Recognition Issues: Overstated receivables due to premature or fictitious revenue recognition.
• Cutoff Errors: Improper recognition of sales in the wrong period.
• Complex Arrangements: Discounts, returns, or contingent pricing complicating receivable valuation.

Fraud Risks

• Overstatement of receivables to inflate financial performance.

• Recording fictitious sales.

Control Risks

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 • Ineffective controls over credit approvals, collection processes, or recording transactions.

3. Audit Procedures

Audit procedures for receivables are performed to address the risks and objectives outlined above. They can be classified as risk
assessment procedures, tests of controls, and substantive procedures.

a. Risk Assessment Procedures

• Obtain an understanding of the entity's processes for recording and managing receivables.
• Perform analytical procedures, such as:
o Comparing current-period receivables to prior periods.
o Assessing days sales outstanding (DSO) or the receivables turnover ratio.
• Review aged receivables reports for trends or unusual balances.

b. Tests of Controls

• Evaluate the design and implementation of controls over:

o Credit approvals.
o Sales invoicing and revenue recognition.
o Monitoring of overdue accounts and collection efforts.
• Perform walkthroughs of receivables processes.

c. Substantive Procedures

1. Existence
o Send confirmation requests to customers:
▪ Positive confirmations: Request customers to confirm balances or transactions directly.
▪ Negative confirmations: Request a response only if the customer disagrees with the stated balance.
o Follow up on exceptions or non-responses with alternative procedures, such as reviewing supporting documents
(e.g., invoices, shipping documents).
2. Valuation and Allocation
o Review the allowance for doubtful accounts:
▪ Assess management's methodology for estimating doubtful accounts.
▪ Compare historical write-off trends with current estimates.
o Test subsequent collections by examining payments received after the balance sheet date.
3. Rights and Obligations
o Verify that receivables are not pledged as collateral or factored without proper disclosure.
o Review loan agreements or correspondence for any restrictions.
4. Completeness
o Trace a sample of shipping documents to sales invoices and then to the ledger.
o Assess whether all shipments near period-end are recorded in the correct period (cutoff testing).
5. Presentation and Disclosure
o Review the classification of receivables (e.g., trade vs. non-trade, current vs. non-current).
o Ensure disclosures comply with applicable accounting standards (e.g., aging analysis, related-party receivables).

4. Common Issues and Red Flags

• Significant increases in receivables without corresponding revenue growth.

• High levels of aged receivables or a rising trend in doubtful accounts.
• Lack of consistency in the estimation methodology for bad debts.
• Sales recorded at the end of the period without shipping documentation.

NOTES ON RECEIVABLES PROBLEMS:

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:
a. 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)
b. 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
c. Adjustments to GL only - will not affect the aging schedule (e.g. 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

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 accounts and interim bad debt provisions, if there are any):
Allowance for Bad Debt Expense
Beginning Balance
Dr: Write-off of Receivables (including Cr: Recovery of Previous Write-off
additional write-off per audit) Cr: Bad Debt Expense (Squeeze)
Required Ending Balance

FOR LOANS RECEIVABLE PROBLEMS (SIMILAR TO FINANCIAL ASSET AT

AMORTIZED COST) 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 xx
Add: Origination costs* xx
Less: Origination fees** (xx)
FMV of the loan/Initial investment xx
*Origination costs are costs that are directly attributed to the loan transaction such as brokers’ fees & commissions,
prof. fees
(e.g.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
Loans receivable shall be measured at the balance sheet date at amortized cost, which shall
be: Initial amount recognized/FMV at initial recognition xx
Less: Principal collections (xx)
Less: Amortization of premium on loan or xx
Add: Amortization of discount on loan (xx)
Less: Impairment loss*, if any (xx)
Amortized cost xx
*IMPAIRMENT LOSS OF LOANS RECEIVABLE
Carrying value of the Loans and Receivable** XX
Less: Present value of expected cash to be recovered
using the ORIGINAL EFFECTIVE INTEREST
RATE (XX)
Impairment Loss/Bad Debt Expense XX.
**include accrued interest as a general rule.

*IMPAIRMENT RECOVERY
PV of remaining future cash flows as revised
as a result of impairment recovery, if any XX
Less: Amortized cost based on the remaining
future cash flows at original effective interest (XX) Gain on recovery – IS* XX
Where maximum impairment recovery shall be to the extent of the Amortized cost of the investment had there been no
impairment.

BALANCE SHEET MEASUREMENT UNDER THE EXPECTED CREDIT LOSS (ECL MODEL)
Credit loss arises when a debtor fails to pay some or all of the contractual payments, including instances of late payment.
IFRS 9 adopts an expected loss model for the recognition of impairment losses on financial assets that are measured at
amortized cost and financial assets with contractual cash flows measured at fair value through other comprehensive income. The
general approach, the entity recognizes the expected loss for a financial asset in accordance with the requirements for:
STAGE 1: INITIAL Entry: Subsequent interest
As soon as a financial asset is originated, RECOGNITION
12-month 12-Month ECL Loss/Expense income shall remain to
credit loss is recognized in the P&L (PV of Estimated Credit XX be based on:
with an allowance being established. Loss*Probability of AllowanceXX Gross CV of
Default) Receivables*E
ff. %
STAGE 2: SIGN. INC. IN CREDIT Entry: Subsequent interest
If the credit risk increases significantly RISK AT THE BS DATE Loss/Expense income shall remain
but that do not have objective evidence Life-time ECL XX to be based on: Gross
of a credit loss event and the resulting (PV of Estimated AllowanceXX CV of
credit quality is not considered to be low Credit (Increase from the Receivables*Eff. %
credit Loss*Probability of previous allowance
risk, life-time ECL is recognized. Default) balance)
STAGE 3: OBJECTIVE
If there is objective evidence that the EVIDENCE OF Entry: Subsequent interest
receivables are impaired (E.g. IMPAIREMENT Loss/Expense income shall now be
probability of insolvency, significant EXISTS XX based on:
financial difficulties of the debtor and Impairment Loss Allowance/ Net CV of
default, significant delay in payments) (CV/Amortized Cost Receivables*Eff.
Less: PV of New Future Receivable XX %
Cash Flows at Original
Effective Rate)

PROBLEM 1: AUDIT OF TRADE RECEIVABLES

You are auditing the Accounts Receivable of Generosity Inc. as of December 31, 2021. The general journal reported
Accounts receivable balance of P1,520,000 which was net of the unadjusted allowance for bad debts expense amounting
to P46,720.
The accounts receivable subsidiary ledger had the following details:
Customer Invoice date Amount Balance
Grace Inc. 9/12/2021 P139,200 P139,200
Truth Corp. 12/12/2021 153,600
12/02/2021 99,200 252,800

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 Gusto Co. 11/17/2021 185,120
10/08/2021 176,000 361,120
National Co. 12/08/2021 160,000
10/25/2021 144,800
8/20/2021 40,000 344,800
Nano Inc. 9/27/2021 96,000 96,000
Bruce Inc. 8/20/2021 71,360 71,360
Privacy Corp. 12/06/2021 112,000
11/29/2021 169,440 281,440
Total P1,546,720

Additional information:
a. You discovered based on your review of subsequent events that Bruce Inc. recently went bankrupt, thus
your suggested that the amount receivable from the same shall be written off.
b. Based on an accounts receivable confirmation reply from National Co., you discovered that sales invoice
dated 10/25/2021 was erroneously invoiced at P144.80 per unit of the merchandise sold to the company,
the correct invoice price should have been P114.80 per unit.
c. You also discovered that the invoice dated 10/25/2021 has already been settled by Truth Corp. per OR
number 34675. This amount however has been erroneously posted against Gusto Co. subsidiary ledger as
a settlement for an invoice dated 11/05/2021 for the same amount.
d. The estimated bad debt rates below are based on the company’s receivable collection experience:
Age of accounts % of
Collectibility 0 – 30 days
98%
31 – 60 days 95%
61 – 90 days 90%
91 – 120 days 80%
Over 120 days 50%
Required:
1. What is the correct allowance for bad debt expense for the year ended December 31, 2021?
a. 117,344 c. 124,344
b. 130,320 d. 127,320
2. Assuming that there were no other entries to the allowance for doubtful accounts, what is the correct bad debt
expense for the year?
a. 80,600 c. 154,960
b. 151,960 d. 148,984
3. What it the carrying value of the company’s accounts receivable as of December 31, 2021?
a. 1,318,040 c. 1,321,016
b. 1,345,040 d. 1,315,040
4. What is the necessary adjusting entry to adjust any unlocated difference between the SL and GL?
a. Bad debt expense 20,000
Accounts 20,000
receivable
b. Sales 20,000
Accounts receivable 20,000
c. Accounts 20,000
receivable Other 20,000
income
d. No necessary entry

PROBLEM 2: AUDIT OF TRADE RECEIVABLES

You were assigned to audit the existence assertion of Colors Inc.’s receivables as of December 31, 2021. You have
decided to send confirmation letters to pre-selected customers. The following is a summary of the confirmation replies of
client customers where you noted audit exceptions. Gross profit on sales is at 30% and inventory records are kept under
the perpetual inventory method.

Customer Balance per Books Customer’s Comments Audit findings

Asul Inc. P30,000 Your Credit Memo No. 0978 The Credit Memo was taken up by
representing price adjustment dated Colors Inc. in January 2022.
December 29, 2021 cancels this.
Bughao Corp. P300,000 P140,000 was for Sales Invoice No. Returned goods were received on
1190 were for goods returned on December 31, 2021. Credit Memo
December 30, 2021. The correct No. 1256 was issued and recorded
balance is P160,000. on January 5, 2022
Kulay Co. P288,000 This is for outstanding sales invoice No. The customer complaint is valid.
1280 which should have been priced at
P122 per unit. You
erroneously billed us P144 per unit.
Dilaw Inc. P265,000 Our records show a correct balance of Colors Inc. recorded the
P200,000. The difference is for Sales transaction as a purchase by
Invoice No. 1109 which were for goods crediting accounts payable. (hint:
delivered to us but were subsequently in the perpetual records)
returned to you
because the goods were with wrong
specifications.
Endigo Corp. P122,000 This is for Sales Invoice No. 1341. We The goods were delivered on
received the corresponding goods only December 30, 2021 under term
on January 5. FOB Destination. Perpetual
records were updated upon
delivery.

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 Requirements:
1. What is the effect on the net income and accounts receivable, respectively, if there are any, as a result of the customer’s
Asul Inc. reply?
a. Decrease by P30K; Decrease by P30K c. Decrease by P9,000; No effect.
b. Increase by P30K; Increase by P30K d. No effect; No effect.
2. What is the effect on the net income and accounts receivable, respectively, if there are any, as a result of the
customer’s Bughao’s reply?
a. Decrease by P48K; Decrease by P160K c. Decrease by P42K; Decrease by P140K
b. Decrease by P140K; Decrease by P140K d. No effect; Decrease by 140K
3. The accounts receivable from Kulay Co. is:
a. Overstated by P244,000 c. Overstated by P44,000
b. Understated by P44,000 d. Correct.
4. What is the effect on the net income, if there are any, as a result of the customer’s Dilaw Inc. reply?
a. Decrease by P65,000 c. Decrease by P19,500
b. Increase by P65,000 d. No effect.
5. What is the effect on the accounts receivable and net income, respectively, if there are any, as a result of the customer’s
Endigo Corp. reply
a. No effect; No effect.
b. Overstated by P122K; Overstated by P36,600.
c. Understated by P122,000; Understated by P36,600.
d. Understated by P122,000; Overstated by P36,600.

PROBLEM 3: VARIOUS RECEIVABLE TRANSACTIONS

The December 31, 2021 statement of financial position of the OP Company included the following information:

Accounts Receivable 672,000

Allowance for credit loss (42,300)
Notes receivable 65,400
Total receivables 695,000

During the year ending December 31, 2022, the following transactions occurred:
A Sales on credit 2,623,800
B Collections of accounts receivable 2,523,000
C Accounts receivable written off as uncollectible 41,400
D Notes receivable collected 87,000
E Customer notes received in payment of accounts receivable 216,000
F Notes receivable discounted that were paid 108,000
G Notes receivable discounted were defaulted including interest 6,075
of P60 and a P15 fee. This amount is expected to be collected
during 2023
H Proceeds from customer notes discounted with recourse 135,225
(principal P135,000, accrued interest P600)
I Collections on accounts previously written off 1,500
J Sales returns and allowances (on credit sales) 6,000
K Increase in allowance for credit loss 39,357

Base on the preceding information, determine the balances of the following accounts at December 31, 2022?
1. Accounts receivable
2. Allowance for credit loss
3. Notes receivable
4. Notes receivable discounted

PROBLEM 4: ASSIGNMENT OF ACCOUNTS RECEIVABLE

On December 1, 2021, Barto Company assigned office accounts receivable totaling P4,000,000 as collateral on a 3,000,000 12%
note from a certain bank. The entity will continue to collect the assigned accounts receivable. In addition to the interest on the
note, the bank also changed a 5% finance fee deducted in advance on the P3,000,000 value of the note.

The December collections of assigned accounts receivable amounted to P2,000,000 less cash discounts of P100,000. On December
31, 2021, the entity remitted the collections to the bank in payment for interest accrued on December 31, 2021 and the note payable.
The entity accepted sales return of P150,000 on the assigned accounts and wrote off assigned accounts of P200,000.

1. What amount of cash was received from the assignment of accounts receivable on December 1, 2021?
2. What is the carrying amount of note payable on December 31, 2021?
3. What is the balance of accounts receivable-assigned on December 31, 2021?

PROBLEM 5: FACTORING OF ACCOUNTS RECEIVABLE

Sam Company factored without recourse P2,000,000 of accounts receivable with a bank. The finance charge is 3% and 5% was
retained to cover sales discounts, sales returns and sales allowances.

1. What amount of cash was received on the sale of accounts receivable?

2. What amount should be recognized as loss on factoring?

PROBLEM 6: DISCOUNTING OF ACCOUNTS RECEIVABLE

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On April 1, 2021, Soft Company discounts with recourse a 9-month, 10% note dated January 1, 2021 with face of P6,000,000.
The bank discount rate is 12%. The discounting transaction is accounted for as a conditional sale with recognition of contingent
liability. On October 1, 2021 the maker dishonored the note receivable. The entity paid the bank the maturity value of the note
plus a protest fee of P50,000. On December 31, 2021 the entity collected the dishonored note in full plus 12% annual intertest on
the total amount due.

What amount was received from the note discounting on April 1, 2021?
What amount should be recognized as loss on note discounting?
What total amount was collected from the customer on December 31, 2021?

PROBLEM 7: AUDIT OF LOANS RECEIVABLES (FINANCING)

ABC Co., a financing company, extended a loan to XYZ Corp. amounting to P10M on January 1, 2015 receivable 5 years
after. The loan bears 10% annual interest collectible at the end of each year starting December 31, 2015. The company
paid direct origination cost amounting to P300,000 and charged XYZ Corp. origination fees at P1,020,955. The yield on
the loan under this arrangement was at 12%.

The 2015 to 2017 interests were collected as scheduled.

By the end of 2018, due to financial difficulties being experienced by XYZ, XYZ failed to pay the annual interest as
scheduled and ABC Co. is doubtful as to the collectibility of the remaining interests and the principal.

After due consideration and correspondence with XYZ company, ABC estimated that it will be able to recover the
following amounts at respective estimated dates:
Amount Expected recovery date
P1,000,000 December 31, 2019
2,000,000 December 31, 2020
2,500,000 December 31, 2021
2,500,000 December 31, 2022
Required:
1. What is the carrying value of the loans receivable as of December 31, 2018, before impairment?
a. 9,519,634 b. 9,392,530 c. 9,821,429 d. 9,661,990

2. How much is impairment loss on the receivables (including interest receivable) as of Dec. 31, 2018?
a. 4,806,499 b. 6,344,509 c. 4,965,938 d. 6,855,491

3. What is the correct net book value of the receivables as of December 31, 2018?
a. 6,855,491 b. 6,344,509 c. 5,855,491 d. 5,344,509

4. Assuming that in December 31, 2019, amounts were received as estimated, what is the balance of the receivables as
of December 31, 2019?
a. 4,225,128 b. 5,558,150 c. 2,232,143 d. 2,500,000

5. Assuming that in December 31, 2020, amounts were received as estimated, what is the correct interest income to
be recognized in 2020?
a. 267,857 b. 702,659 c. 507,015 d. 666,978

THEORIES:
1. A document sent to each customer showing their beginning accounts receivable balance and the amount and date of
each sale, cash payment received, credit memo issued, and the ending accounts receivable balance is the:
a. Accounts receivable subsidiary ledger c. Remittance advice
b. Monthly statement d. Sales invoice
2. Before goods are shipped on account, a properly authorized person must
a. Prepare the sales invoice c. Approve credit
b. Approve journal entry d. Verify the unit price is accurate
3. For the most firms, the function of indicating credit approval is recorded on the
a. Customer order c. Remittance advice
b. Sales order d. Sales invoice
4. Most companies recognize sales when
a. A customer order is
received
b. The merchandise is
shipped
c. The merchandise is received by the customer
d. Cash is received on account
5. Which of the following would an auditor be concerned with when examining the billing function of client?
a. All shipments made have been billed
b. No shipment has been billed more than once
c. Each shipment has been billed for the proper amount
d. All three are of concern
6. Proper auditing requires that an account receivable must be charged off by client when
a. Client company concludes that an amount is no longer collectible
b. Customer files for bankruptcy
c. A collection agency cannot inspire customer to pay the debt
d. The account is at least six month old.
7. In many audits of sales transactions, no substantive tests of transactions are made for the completeness objective on
the ground that

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 a. Overstatements of assets and income are greater concern than understatement
b. Understatements of assets and income are greater concern than overstatements
c. It doesn’t matter if income is understated because the savings on income tax offsets the reduced revenue
and net income is correct
d. The reduced sales causes a reduction of the accounts receivable therefore the ratios of the two financial
statements will not be misleading.

8. Which of the following is least likely to be considered an inherent risk relating to receivables and revenues?
a. Restrictions placed on sales by laws and regulations
b. Decline in sales due to economic declines
c. Decline in sales due to product obsolescence
d. Over-recorded sales due to a lack of control over the sales entry function
9. Which of the following would provide the most assurance concerning the valuation of accounts receivable?
a. Trace amounts in the accounts receivable subsidiary ledger to details on the shipping document
b. Compare receivable turnover ratios to industry statistics for reasonableness
c. Inquire about receivables pledged under loan agreements
d. Assess the allowance for uncollectible accounts for reasonableness
10. Which of the following is most likely to be an example of fraudulent financial reporting relating to sales?
a. Inaccurate billing due to a lack of controls
b. Lapping of accounts receivable
c. Misbilling a client due to a data input error
d. Recording sales when the customer is likely to return the goods
11. Which of the following is an example of misappropriation of assets relating to sales?
a. Accidentally recording cash that represents a liability as revenue
b. Holding the sales journal open to recorded next year’s sales as having occurred in the current year
c. Intentionally recording cash received from a new debt agreement as revenue
d. Theft of cash register sales
12. There is a presumption that auditors will confirm accounts receivable unless the auditor’s assessment of the risk of
material misstatement is low
a. And accounts receivable are immaterial, or the use of confirmations would be ineffective
b. And accounts receivable are composed of large accounts
c. And the effectiveness of confirmations is absolutely determined
d. Or accounts receivable are from extremely reputable customers.
13. To determine that all valid sales have been recorded, the auditors would select sample of transactions from the
; This is necessary to support the assertion over sales.
a. Shipping documents file; Completeness
b. Sales journal; Existence
c. Accounts receivable subsidiary ledger; Existence
d. Remittance advices; Completeness
14. Which of the following would most likely be detected by an auditor’s review of the client’s sales cut-off?
a. Excessive goods returned for credit
b. Unrecorded sales discounts
c. Lapping of year-end accounts receivable
d. Inflated sales for the year
15. To test existence assertion of recorded receivables, the auditors would select sample from the:
a. Sales order file
b. Customer purchase orders
c. Accounts receivable subsidiary ledger
d. Shipping documents (bill of lading) file.
16. Which of the following relating to sales is most directly addressed when the auditors compare a sample of shipping
documents to related sales invoices?
a. Existence or occurrence
b. Completeness
c. Rights and obligation
d. Presentation and disclosure
17. Park, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent
residents’ delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the
accounts receivable balances at the balance sheet date. Park, CPA most likely would:
a. Send negative confirmation letter
b. Examine evidence of subsequent cash receipt
c. Inspect the internal records, such as copies of tax invoices that were mailed to the residents
d. Sent positive confirmation request
18. Fork, CPA is engaged in audit of a cable TV firm which services a rural community. All recieable balances are
small, customers are billed monthly an internal control is effective. To determine the validity of accounts receivable
balances at the balance sheet date, Fork would most likely:
a. Send positive confirmation requests.
b. Send negative confirmation requests.
c. Examine evidence of subsequent cash receipts instead of sending confirmation requests.
d. Use statistical sampling instead of sending confirmation request.
19. Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper
write-off of a trade accounts receivable:

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 a. Write-offs must be approved by a responsible official after review of credit department
recommendations and supporting evidence
b. Write-offs must be approved by accounts receivable department
c. Write-offs must be authorized by shipping department
d. Write-offs must be supported by an aging schedule showing that only receivables overdue by
several months have been written-off.
20. An effective procedure to test for unbilled shipments is to trace from the . This is to support the
financial statement assertion of over sales and receivables.
a. Sales journal to shipping documents; existence/occurrence.
b. Shipping documents to the sales journal; completeness.
c. Sales journal to the accounts receivable subsidiary ledger; existence/occurrence.
d. Sales journal to the general ledger sales account; completeness.
21. Bok No Manufacturing received a substantial sales return on December 31, 2020, but credit memorandum for the
returns were not prepared and recorded until March 4, 2021. The returned merchandise was included in the year-end
physical inventory taken on December 31, 2021. The most effective procedure for preventing this type of error and
its implication on the net income are:

a. Prepare an aged schedule of accounts receivable monthly; Net income is overstated by the gross profit
on sales.
b. Prenumber and account for all credit memorandums; Net income is overstated by the amount of gross
sales.
c. Reconcile the subsidiary accounts receivable ledger with the general ledger control account monthly;
Net income is overstated by the cost of inventory.
d. Prepare and numerically control receiving reports for all materials received; Net income is overstated by
the amount of gross sales.
22. An auditor should perform alternative audit procedures to substantiate the existence of accounts receivable when:
a. No reply to a positive confirmation request is received.
b. No reply to a negative confirmation request is received.
c. Collectibility of the receivable is in doubt.
d. Pledging of receivables is probable.
23. It is sometimes necessary for an auditor to use alternative audit procedure specially in instances where reply on
positive confirmation requests is not received even for a second set of confirmation requests. In such a situation, the
best alternative procedure the auditor might resort to would be
a. Examining subsequent receipts of year-end accounts receivable.
b. Reviewing accounts receivable gaining schedule prepared at the BS date and at a subsequent date.
c. Requesting that management increase the allowance for uncollectible accounts by an amount equal to some
percentage of the balance in those accounts that cannot be confirmed
d. Performing an overall analytical review of accounts receivable and sales on a year-to-year basis.
24. Returns of positive confirmation requests for accounts receivable were very poor. As an alternative procedure, the
auditor decided to check subsequent collections. The auditor had satisfied himself that the client satisfactorily listed
the customer name next to each check listed on the deposit slip; hence, he decided that for each customer for which a
confirmation was not received that he would add all amounts shown for that customer on each validated deposit slip
for the two months following the balance sheet date. The major fault in the auditor’s procedure is that”:
a. Checking of subsequent collection is not an accepted alternative auditing procedure for confirmation
of accounts receivable
b. By looking only at the deposit slip the auditor would not know if the payments was for the receivable at
the balance sheet date or a subsequent transaction
c. The deposit slip would not be received directly by the auditor as a confirmation would be
d. A customer may not have made a payment during the two-month period.
25. When scheduling the audit work to be performed on an engagement, the auditor should consider confirming accounts
receivable balances at an interim date if
a. Subsequent collections are to be reviewed.
b. Internal control over receivables is good
c. Negative confirmations are to be used
d. There is a simultaneous examination of cash and accounts receivable.

References:
Auditing and Assurance by Assuncion, Ngina, Escala
Auditing problems by Gerardo Roque
Intermediate Accounting by Conrado T. Valix
RESA Review School
CPAR

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