16,400 Accounts receivable 16,400
70 2 Accounts receivable
15,000 Allowance for doubtful accounts
15,000 Erroneous recording of recovery from written off account
3 Allowance for doubtful accounts
21,000 Accounts receivable (>90 days)
21,000 Accounts that should be written off
4 Net sales
12,000 Accounts receivable (<60 days)
12,000 Unrecorded credit memo
5 Net sales
1,200 Accounts receivable (<60 days)
1,200 Unrecorded employee discount
6 Net sales
18,000 Accounts receivable (<60 days)
18,000 Inventory 13,000 Cost of sales 13,000 Goods out on consignment erroneously
billed
7 Freight out
1,500 Accounts receivable (<60 days)
1,500 Unrecorded freight-out
71 8 Allowance for doubtful accounts
1,378 Doubtful accounts expense
1,378
60 days old and below
205,800 1 % 2,058 61 to 90 days 117,200 2 % 2,344 Over 90 days 64,400 5 % 3,220 Required allowance 7,622 Balance per books before this adjustment (15,000+15,000-
21,000) 9,000 Adjustment 1,378
PROBLEM NO. 4 – Audit of allowance for doubtful accounts
Professional company produces paints and revealed products for sale to the construction industry throughout Metro Manila. While sales have remained relatively stable despite a decline in the amount of new construction, there has been a noticeable change in the timeliness with which the company’s customers are paying their bills.
The company sells its products on payment terms of 2/10, n/30. In the past, over 75 percent of the credit customers have taken advantage of the discount by paying within 10 days of the invoice date. During the year ended December 31, 2015, the number of customers taking the full 30 days to pay has increased. Current indications are that less than 60% of the customers are now taking the discount. Uncollectible accounts as a percentage of total credit sales have risen from the 1.5% provided in the past years to 4% in the current year.
In response to your request for more information on the deterioration of accounts receivable collections, the company’s controller has prepared the following report:
Professional Company
Accounts Receivable Collections December 31, 2015
The fact that some credit accounts will prove uncollectible is normal, and annual bad debt write- offs had been 1.5% of total credit sales for many years. However, during the year 2015, this percentage increased to 4%. The accounts receivable balance is P1,500,000, and the condition of this balance in terms of age and probability is shown below:
72
Proportion to total Age of Accounts Probability of collection
64% 1-10 days 99.0%
18% 11-30 days 97.5%
8% Past due 31-60 days 95.0%
5% Past due 61-120 80.0%
3% Past due 121-180 65.0%
2% Past due over 180 days 20.0%
At the beginning of the year, the Allowance for Doubtful Accounts had a credit balance of P27,300. The company has provided for a monthly bad debt expense accrual during the year based on the assumption that 4% of total credit sales will be uncollectible. Total credit sales for the year 2015 amounted to P8,000,000, and write-offs of uncollectible accounts during the year totaled P292,500. REQUIRED:
1. Adjusted balance of the allowance for doubtful accounts as of December 31, 2015.
2. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of December 31, 2015.
SOLUTION:
Requirement No.1
Category Aging ratio AR Balance Rate Allowance 1 – 10 days 64% 960,000 1.00% 9,600 11 – 30 days 18% 270,000 2.50% 6,750 31 – 60 days 8% 120,000 5.00% 6,000 61 – 120 days 5% 75,000 20.00% 15,000 121 – 180 days 3% 45,000 35.00% 15,750 over 180 days 2% 30,000 80.00% 24,000 100% 1,500,000 77,100 Requirement No.2
73
Doubtful accounts expense 22,300 *
Allowance for doubtful accounts 22,300
Allowance for doubtful accounts, 1/1 27,300
Add provisions (P8,000,000 x 4%) 320,000
Total 347,300
Less accounts written-off 292,500
Balance before adjustment 54,800
Required allowance (see no.
1) 77,100
Additional required allowance for doubtful accounts 22,300
PROBLEM NO. 5 – Analysis of accounts receivable and related accounts
The poster Co. sells direct to retail customers and also to wholesalers. Accounts receivable and an allowance for bad debts are maintained separately for each division. On January 1, 2015 the balance of the retail accounts receivable was P209,000 while the bad debts with respect to retail customers was a credit of P7,600.
The following summary pertains only to retail sales since 2012:
Credit Sales Bad Debts Written Off Bad Debts Recoveries
2012 P1,110,000 P26,000 P2,150
2013 1,225,000 29,500 3,750
2014 1,465,000 30,000 3,600
2015 1,500,000 31,000 4,200
Bad debts are provided for as a percentage of credit sales. The accountant calculates the percentage annually by using the experience of the three years prior to the current year. The formula is bad debts written off less recoveries expressed as a percentage of the credit sales for the same period. Cash receipts in 2015 from credit sales to retail customers was P1,380,000.
REQUIRED:
Determine the following:
1. Adjusted accounts receivable as of December 31, 2015
74 SOLUTION: Requirement No. 1 Accounts receivable, 1/1/12 209,000 Credit sales for 2012
1,500,000 Collections during 2012
(1,380,200) Accounts written off - 2012
(31,000) Accounts receivable, 12/31/12 297,800 Requirement No. 2
Allowance for doubtful accounts, 1/1/12
7,600 Doubtful accounts expense - 2012 (see computation below)
30,000 Accounts written off - 2012
(31,000) Recovery of accounts written off – 2012
4,200 Allowance for doubtful accounts, 12/31/12
10,800
Computation of doubtful accounts expense - 2012:
Doubtful accounts expense for 2012 (P1,500,000 x 2%)
30,000
Computation of bad debt rate:
Year Credit sales AR writen-off Recoveries Net 2009 1,110,000 26,000 2,150 23,850 2010 1,225,000 29,500 3,750 25,750 2011 1,465,000 30,000 3,600 26,400
75 3,800,000 85,500 9,500 76,000
Net accounts written off (2009 to 2011)
76,000 Divide by credit sales (2009 to 2011)
3,800,000 Percentage of uncollectible accounts to charge sales 2.00%
PROBLEM NO. 6 – Audit of accounts receivable and related accounts
In connection with your examination of the financial statements of RIngo, Inc. for the year ended December 31, 2015, you were able to obtain certain information during your audit of the accounts receivable and related accounts.
The December 31, 2015 balance in the Accounts Receivable control accounts is P837,900. An aging schedule of the accounts receivable as of December 31, 2015 is presented below:
Age Net debit balance Percentage to be applied after corrections have been made
60 days & under P387,800 1 percent
61 to 90 days 307,100 2 percent
91 to 120 days 89,800 5 percent
Over 120 days 53,200 Definitely uncollectible, P9,000; the remainder is estimated to be 25% uncollectible.
P837,900
The Allowance for Doubtful Accounts schedule is presented below:
Debit Credit Balance
January 1, 2015 P19,700
November 30, 2015 P6,100 13,600
December 31, 2015(P837,900 x 5%) P41,895 P55,495
Entries made to Doubtful Accounts Expense account were:
1. A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.
2. A credit for P6,100 on November 30, 2015, and a debit to Allowance for Doubtful Accounts because of a bankruptcy. The related sales took place on October 1, 2015. There is a credit balance in one account receivable (61 to 90 days) of P11,000, it represents
an advance on a sales contract. REQUIRED:
76 1. Determine the following as of and for the year ended December 31, 2015:
a. Accounts receivable
b. Allowance for doubtful accounts c. Doubtful accounts expense
2. Adjusting entries as of December 31, 2015
SOLUTION:
Requirement No. 1.a
GL/SL 60 61 to 90 91 to 120 over
120
Unadjusted balances
837,900 387,800 307,100 89,800 53,200
Add (deduct) adjustments:
AJE No. 1 (9,000) (9,000) AJE No. 2 (6,100) (6,100) AJE No. 3 11,000 11,000 Adjusted balances 833,800 387,800 318,100 83,700 44,200 Requirement No. 1.b
Age of accounts balance Rate Allowance
60 387,800 1% 3,878 61 to 90 318,100 2% 6,362 91 to 120 83,700 5% 4,185 over 120 44,200 25% 11,050 833,800 25,475 Requirement No. 1.c
77 Unadjusted allowance for doubtful accounts
55,495 Add (deduct) adjustments:
AJE no. 1
(9,000) AJE no. 4 (squeeze)
(21,020)
(30,020) Required allowance (see no. 1.b)
25,475
Balance per books (P41,895 - P6,100) 35,795 Add (deduct) adjustments:
AJE no. 2 6,100 AJE no. 4 (21,020) (14,920) Doubtful accounts expense per audit
20,875
Requirement No. 2
Adjusting journal entries:
1) Allowance for doubtful accounts
9,000
Accounts receivable - over 120 days 9,000 To write off definitely uncollectible
accounts
2) Doubtful account expense
6,100
Accounts receivable - 91 to 120 days 6,100 To correct entry made in recording accounts written off
3) Accounts receivable - 61 to 90 days 11,000
Advances from
customers
11,000
78 To reclassify advances from customers
4) Allowance for doubtful accounts 21,020 Doubtful account expense 21,020 To adjust allowance to required balance
PROBLEM NO. 7 – Analysis of notes receivable and related accounts
The balance sheet of Yoko Corporation reported the following long-term receivables as of December 31, 2014:
Note receivable from sale of plant P6,000,000
Note receivable from officer 1,600,000
In connection with your audit, you were able to gather the following transactions during 2015 and other information pertaining to the company’s long-term receivables:
a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3 annual installments of P2,000,000 plus interest on the unpaid balance every April 1. The initial principal and interest payment was made on April 1, 2015.
b. The note receivable from officer is dated December 31,2014, earns interest at 10% per annum, and is due on December 31,2017. The 2015 interest was received on December 31,2015.
c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2015, in exchange for an P800,000 non-interest bearing note due on April 1,2017. 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, 2015, was 12%. The present value factor of 1 for two periods at 12% is 0.797.
d. A tract of land was sold by the corporation to No Co. on July 1, 2015, for P4,000,000 under an installment sale contract. No Co. signed a 4-year 11% note for P2,800,000 on July 1,2015, in addition to the down payment of P1,200,000. The equal annual payments of principal and interest on the note will be P902,500 payable on July 1, 2016, 2017, 2018 and 2019. The land had an established cash price of P4,000,000 and its cost to the corporation was P3,000,000. The collection of the installments on this note is reasonable assured.
REQUIRED:
Determine the following as of and for the year ended December 31,2015: 1. Noncurrent receivables
2. Current portion of long-term receivables 3. Accrued interest receivable
79 4. Interest income
5. SOLUTION:
Requirement No. 1
Note receivable from sale of plant
Balance, 12/31/12 (P6,000,000 - P2,000,000)
4,000,000
Less installment due on April 1, 2013
2,000,000
2,000,000
Note receivable from officer, due 12/31/14
1,600,000 Note receivable from sale of equipment
Present value of note, 4/1/12 (P800,000 x 0.797) 637,600 Discount amortization-2012 (P637,600 x 12% x 9/12)
57,384
694,984 Note receivable from sale of
land
Balance, 12/31/12
2,800,000 Less principal installment due on 7/1/13
Total amount to be received
902,500 Less interest (P2,800,000 x 11%) 308,000 594,500 2,205,500
Total noncurrent receivables, 12/31/12
6,500,484
Requirement No. 2
Note receivable from sale of plant due on 4/1/13
2,000,000 Note receivable from sale of land (see no. 1)
594,500
Current portion of long-term receivables
80 Requirement No. 3
Note receivable from sale of plant (P4,000,000 x 12% x 9/12) 360,000 Note receivable from sale of land (P2,800,000 x 11% x 6/12)
154,000
Accrued interest receivable, 12/31/12
514,000 Requirement No. 4
Note receivable from sale of plant:
P6,000,000 x 12% x 3/12 180,000 P4,000,000 x 12% x 9/12 360,000 540,000 Note receivable from officer (P1,600,000 x
10%)
160,000 Note receivable from sale of equipment (P637,600 x 12% x
9/12)
57,384 Note receivable from sale of land (P2,800,000 x 11% x 6/12)
154,000
Total interest income for 2012
911,384
PROBLEM NO. 8 – Audit of notes receivable and related accounts
On January 1, 2015, Pedro Company sold land that originally cost P400, 000 to Buyer Company. As payment, Buyer gave Pedro Company a P600, 000 note. The note bears an interest rate of 4% and is to be repaid in three annual installments of P200, 000 (plus interest on the outstanding balance). The first payment is due on December 31, 2015. The market price of the land is not reliably determinable =. The prevailing rate of interest for notes of this type is 14% on January 1, 2015 and 15% on December 31, 2015.
Pedro made the following journal entries in relation to the sale of land and the relate note receivable.
January 1, 2015
Notes Receivable P600,000
Land P400,000
Gain on sale of Land 200,000
81
Cash P224,000
Notes receivable P200,000
Interest income 24,000
Pedro reported the notes receivable in its statement of financial position at December 31, 2015 as part of trade and other receivables.
REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015: a. Correct gain on sale of land
b. Correct interest income c. Overstatement of profit
d. Correct carrying amount of note receivable e. Overstatement of working capital
2. Adjusting entries as of December 31, 2015 SOLUTION:
Requirement No. 1.a
PV of consideration receivable (see computation below) 503,105 Carrying amount of land (400,000) Correct gain on sale of
land
103,105
Present value of cash flows to determine initial CA:
Date Principal Interest (4%) Total PVF (14%) PV, 1/1/12 PV, 12/31/12 12/31/1 2 200,000 24,000 224,000 0.8772 196,493 12/31/1 3 200,000 16,000 216,000 0.7695 166,212 189,475 12/31/1 4 200,000 8,000 208,000 0.6750 140,400 160,056 600,000 503,105 349,531
82
Requirement No. 1.b
Amortization schedule using effective interest method: Date EI (14%) NI (4%) Disc. Amort. Repayment AC 1/1/12 503,105 12/31/1 2 70,435 24,000 46,435 200,000 349,540 12/31/1 3 48,936 16,000 32,936 200,000 182,476 12/31/1 4 25,524 8,000 17,524 200,000 - 23 Interest income - 2012 (P503,105 x .14) 70,435 Requirement No. 1.c
Gain on sale of land - overstated (P200,000 - P103,105)
96,895 Interest income for 2012 - understated (P70,435 -
P24,000)
(46,435)
Net overstatement of 2012 profit
50,460
Requirement No. 1.d
Carrying amount, 12/31/12 (see schedule)
349,540
Requirement No. 1.e
Amount reported as notes receivable 400,000 Correct current portion of NR (P349,540 - P182,476)
167,064 Overstatement of CA/working capital
232,936
83 Requirement No. 2 Adjusting journal entries:
To corect the entrymade to record the sale of land on 1/1/12:
Gain on sale of land
96,895
Discount on notes receivable (FV-PV) 96,895
To record amortization of discount on 12/31/12: Discount on notes receivable
46,435
Interest income
46,435
PROBLEM NO. 9 – Audit of notes receivable and related accounts
My Love Corporation is a local company engaged in buying and selling of manufacturing equipment. On 1 January 2014, My Love Corporation sold equipment, with cash price of P1,500,000, to Silly Love Corporation. The cost of the equipment is P750,000. Silly Love signed a deferred payment contract that provides for a down payment of P300,000and a 5-year notes for P1,705,900. The note is to be paid In 5 equal annual payments of P341,180. The payments include interest and are made on December 31 of each year, beginning on December 31, 2014.
My Love Corporation made the following entries in relation to the sale of the equipment and the related note receivable:
January 1, 2014
Cash P 300,000
Notes Receivable 1,705,900
Cost of goods sold 750,000
Sales P2,005,900
Inventory 750,000
84 Cash P 341,180 Notes Receivable P 341,180 December 31, 2015 Cash P 341,180 Notes Receivable P 341,180
My Love Corporation reported the notes receivable in its statement of financial position at December 31, 2014 and 2015 as part of trade and other receivables.
REQUIRED:
Determine the following:
1. The effective interest rate 2. Overstatement of profit for 2014
3. Overstatement of retained earnings as of December 31,2015 4. Overstatement of working capital as of December 31,2015
SOLUTION:
Requirement No. 1
PVF used to calculate the annual payment (P1.2M/P341,180) 3.5172
Ordinary annuity factor at 13% for 5 periods 3.5172
Requirement No. 2 Profit
over (under)
Sales - over
Reported 2,005,900
Should be 1,500,000 505,900
Interest income - under
Reported 0
85
Net misstatement 349,900
Requirement No. 3 RE, 12/31/12
over (under)
2011 profit overstated (see no. 2) 349,900
2012 profit understated (interest income under)
Reported 0
Should be (refer to amortization schedule) 131,927 (131,927)
Net misstatement 217,973
Requirement No. 4
Amount reported under current assets
[P1,705,900 - (P341,180 x 2)] 1,023,540
Should be (refer to amortization schedule) 236,456
Net misstatement of WC, 12/31/12 - over (under) 787,084
Amortization schedule:
Date Payment Interest (13%) Principal CA
1,200,000 12/31/11 341,180 156,000 185,180 1,014,820 12/31/12 341,180 131,927 209,253 805,567 12/31/13 341,180 104,724 236,456 569,111 12/31/14 341,180 73,984 267,196 301,915 12/31/15 341,180 39,265 301,915 - 1,705,900
86 PROBLEM NO. 10 – Analysis of notes receivable and related accounts
You are examining the financial statements of Merlyn, In., for the year ended December 31, 2015. Your analysis of the 2015 entries in the Notes Receivable account follows:
Merlyn, Inc.
Analysis of Notes Receivable
For the Year Ended December 31,2015 Date
2015 Debit Credit
Jan. 1 Balance Forwarded P118,000
Received P25,000 6% note due 10/29/15 from Anna whose trade account was past due.
Feb. 28 Discounted Anna note P24,960
Mar. 31 Received non-interest-bearing demand 6,200 note from Julia, the corporation’s
treasurer for a loan
Aug. 30 Received principal and interest due from 34,200
Robinson in accordance with agreement, two principal payments in advance.
Sept. 4 Paid protest fee on note dishonored 500 by Pepper.
Nov. 1 Received check dated 2/1/16 in 8,120
settlement of Tripper note. The check was included in cash on hand 12/31/15
Nov. 4 Paid protest fee and maturity value of 26,031 Anna note to bank. Note discounted
87
Dec. 27 Accepted equipment with a fair market 24,000
value of P24,000 in full settlement from Anna
Dec. 31 Received check dated 1/2/16 from 6,200
Julia in payment of 3/31/15 note. (The Cash was included in petty cash until 1/2/16 when it was returned to Julia in exchange for new demand note for the same amount.)
Dec. 31 Received principal and interest on
Pepper note 42,437
Dec. 31 Accrued interest on Robinson note 1,200
P151,931 P139,917
The following information is available:
(1) Balances at January 1, 2015, were a debit of P1,400 in the Accrued Interest Receivable account and accredit of P400 in the Unearned Interest Income account. The P118,000 debit in the Note Receivable account consisted the following three notes:
Robinson note of 8/31/08 payable in annual
installments of P10,000 principal plus accrued P70,000 interest at 6% each August 31
Tripper note discounted to Merlyn, Inc. at 6%
11/1/14 due 11/1/15 8,000
Pepper note for P40,000 plus 6% interest dated
12/31/14 due on 9/1/15 40,000
(2) No entries were made during 2015 to the Accrued Interest Receivable of the Unearned Interest Income account and only one entry for a credit of P1,200 on December 31, appeared in the Interest Income account.
88 (4) Debits and credits affecting Notes Receivables were correctly recorded unless the facts
indicate otherwise.
REQUIRED:
1. Determine the following as of and for the year ended December 31,2015: a. Notes receivable- trade
b. Interest income
2. Adjusting entries as of December 31,2015
SOLUTION:. Requirement No. 2 1/1 Notes receivable 25,000 Accounts receivable 25,000 2/28 Notes receivable 24,960 Loss on discounting (P25,250 - P24,960) 290
Notes receivable - discounted 25,000
Interest income (P25,000 x .06 x 2/12) 250
3/29 Notes receivable - Officers 6,200
Notes receivable 6,200
8/30 Notes receivable 4,200
Interest receivable 1,400
89
9/4 Notes receivable dishonored 500
Notes receivable 500
Notes receivable dishonored 40,000
Notes receivable 40,000
11/1 Notes receivable 8,120
Cash 8,120
11/4 Notes receivable dishonored 26,031
Notes receivable 26,031
Notes receivable discounted 25,000
Notes receivable 25,000
12/27 Notes receivable 24,000
Loss on settlement of NR 2,031
Notes receivable dishonored 26,031
12/31 Notes receivable 6,200
Petty cash fund 6,200
12/31 Notes receivable 42,437
Notes receivable dishonored 40,500
90 12/31 Interest receivable (P40,000 x 6% x 4/12) 800 Interest income 400 Notes receivable 1,200 12/31 Interest receivable (P8,000 x 6% x 2/12) 80 Interest income 80
12/31 Unearned interest income 400
Interest income 400
Requirement No. 1.a
Unadjusted trade NR 12,014
Add (Deduct) adjustments:
1/1 25,000 2/28 24,960 3/29 (6,200) 8/30 4,200 9/4 (40,500) 11/1 8,120 11/4 (26,031) (25,000) 12/27 24,000 12/31 6,200
91 12/31 42,437 12/31 (1,200) Adjusted trade NR, 12/31/12 48,000 Composition: Robinson (P70,000 - P30,000) 40,000 Tripper (received PDC on 11/1) 8,000
Adjusted notes receivable-trade, 12/31/12 48,000
Notes:
1) NR from Pepper - collected on 12/31/12
2) NR from Anna - accepted equipment in full settlement on 12/27/12 3) NR from Julia - non-trade
Requirement No. 1.b Robinson: Jan. to Aug. (P70,000 x .06 x 8/12) 2,800 Sept. to Dec. (P40,000 x .06 x 4/12) 800 3,600 Tripper (P8,000 x .06 x 12/12) 480 Pepper (P42,437 - P40,500) 1,937 Anna (P25,000 x .06 x 2/12) 250
Julia (non-interest bearing) -
Total interest income - 2012 6,267
PROBLEM NO. 11 – Loan impairment
Bahrain Bank granted a loan to a borrower in the amount of P10,000,000 on January 1,2014. The interest rate on the loan is 10% payable annually starting December 31, 2014. The loan matures in
92 five years on December 31, 2018. Bahrain Bank incurs P130,900 of direct loan origination cost and P50,000 of indirect loan origination cost. In addition, Bahrain Banks charges the borrower a 5-point nonrefundable loan origination fee.
The borrower paid the interred due on December 31, 2014. However during 2015 the borrower began to experience financial difficulties, requiring the bank to reassess the collectability of the loan. As of December 31, 2015, the bank expects that only P8,000,000 of the principal will be recovered. The P8,000,000 principal amount is expected to be collected in two equal installments on December 31,2017 and December 31,2019. The prevailing interest rates for similar type of note as of December 31, 2014 and 2015 are 15% and 16%, respectively.
REQUIRED:
Determine the following:
1. Interest income to be recognized in 2014
2. Carrying amount of the loan as of December 31, 2014 3. Loan impairment loss to be recognized in 2015 SOLUTION:
Requirement No.s 1 & 2
Principal 10,000,000
Direct origination cost 130,900
Origination fee received from borrower (P10M x .05) (500,000)
Carrying amount, 1/1/12 9,630,900
Amortization schedule
Date EI (11%) NI (10%) Disc. Amort. C.A.
1/1/11 9,630,900
12/31/11 1,059,399 1,000,000 59,399 9,690,299 12/31/12 1,065,933 1,000,000 65,933 9,756,232 12/31/13 1,073,186 1,000,000 73,186 9,829,418
93 12/31/14 1,081,236 1,000,000 81,236 9,910,654 12/31/15 1,089,346 1,000,000 89,346 10,000,000 826 Requirement No. 3
Carrying amount, 12/31/12 (see schedule) 9,756,232 Less PV of expected cash flows:
12/31/14 (P4M x 0.8116) 3,246,400
12/31/16 (P4M x 0.6587) 2,634,800 5,881,200
Loan impairment (bad debt expense) 3,875,032
PROBLEM NO. 12 – Theory
Select the best answer for each of the following:
1. In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate?
a. Equipment b. Bank charges c. Bonds payable d. Sales
2. The purpose of tests of controls over shipping is to determine whether a. Billed goods have been shipped.
b. Shipments are billed.
c. Shipping department personnel are competent. d. Credit approved before goods are shipped.
3. The purpose of tests of controls over billing is to determine whether a. Billed goods have been shipped
b. Shipments are billed.
c. Billing department personnel are competent. d. Credit is approved before goods are billed.
94 4. 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. Existence or occurrence b. Rights and obligations c. Valuation
d. Completeness
5. Which of the following might be detected by an auditor’s review of 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
6. An auditor who has confirmed accounts receivable may discover that the sales journal was held open past year-end if
a. Positive confirmation 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 larger balance that the amount being confirmed.
7. The auditor finds situation in which one person has the ability to collect receivables, make deposits, issue credit memos and record receipt of payments. The auditor suspects the individual may be stealing from cash receipts. Which of the following audit procedures would be most effective in discovering fraud in this scenario?
a. Send positive confirmations to a random selection of customers.
b. Send negative confirmations to all outstanding accounts receivable customers. c. Perform, a detailed review of debits to customer discounts, sales returns, or other
debit accounts, excluding cash posted to the cash receipts journal.
d. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the cash receipts journal.
8. All of the following are examples of substantive tests to verify valuation of net accounts