SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Accountancy Department

ACCT 1093 – Auditing and Assurance: Concepts and Applications, Part 1

Lesson 3: Substantive Tests of Details of Balances: Trade Receivables and Sales

EXERCISES

PROBLEM 1 – Substantive Procedures VS. Assertions

Identify by letter the assertions addressed in each of the following substantive procedures relating to audit of
the revenue and collection cycle:
Assertions:
A. Existence
B. Rights and Obligations
C. Completeness
D. Valuation and Allocation
E. Presentation and Disclosure

Substantive Procedures:
1. Obtain confirmation of receivables.
2. Compare the disclosures made in the financial statements with the requirements of the IFRS.
3. Obtain confirmation of receivables pledged under loan agreements«
4. Vouch recorded sales transactions back to customer order and shipping document.
5. Perform cutoff tests for sales and sales returns.
6. Perform cutoff tests for cash collections.
7. Compare current year's cash sales with those of previous year.
8. Reconcile subsidiary records with the general ledger records for accounts receivable.
9. Review credit collection policies and procedures and analyze the age of the receivables
10. Examine credit files for large accounts.
11. Perform analytical review procedures to evaluate appropriateness of the balance of the allowance for
uncollectible accounts
12. Inspect notes receivable.
13. Recompute interest revenue
14. Identify related party transactions
15. Inquire from management, examine bank confirmations and review minutes of meetings to identify
receivables pledged or collateralized.

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PROBLEM 2 – Confirmation of Accounts Receivable
You are assigned to audit the Amazon Company for the year ending June 30, 2020. The accounts receivable
were circularized as at June 30, 2020 and the following exceptions have not been disposed of.

Customer Balance Comments from Customers Audit Findings

A P 30,000 Balance was paid on June 29, 2020
B 74,000 Balance was offset by our June 10
shipment of tires
C 16,200 The above balance has been paid.
D 10,000 Our records show a bigger balance,
please check.
E 24,000 We do not owe Amazon anything on June
30 as goods were received in July 2020,
FOB destination.
F 15,000 Our deposit of P60,000 should cover this
balance.
G 85,000 We never received these goods.
H 10,000 We are rejecting the price, which is too
much.
I 180,000 Amount is okay. Since this is on
consignment, we will remit payment upon
selling the goods.
J 5,000 CM no. 3256 cancels this balance.
Amazon received mailed check on July 2,
2020.
Amazon credited accounts payable for
P74,000 to record purchase of tires.
The balance was credited to Customer L
A new confirmation was mailed.
The shipment costing P16,500 was made on
June 29, 2020 and the goods were not
included in recording the June 30, 2020
inventory.
Amazon had previously credited the deposit
to sales.
The shipment was erroneously made to
another customer, and the goods costing
P59,000 are now on its ways to G. The
shipment was made FOB destination.
Amazon’s clerk erroneously computed the
unit price at P200. The correct pricing should
have been at P150 per unit.
Goods cost P120,000 and were excluded in
Amazon’s inventory.
The CM dated May 31, 2020 was recorded
by Amazon in July 2020.

Required: Prepare the necessary adjusting journal entries at June 30, 2020 in connection with the
foregoing data.

PROBLEM 3 – Confirmation and Aging Analysis

Annette dela Cruz of Cruz and Cabrera, CPAs, has been assigned to the Monty's Meat, Inc., audit for the fiscal
year ended October 31. She currently is completing the audit of accounts receivable by reviewing returned
accounts receivable confirmations and evaluating the adequacy of the allowance for doubtful accounts.

Monty's Meat buys beef, pork, and poultry from local slaughterhouses, processes it, and sells it to area grocery
retailers and restaurants. As of October 31, the company had 450 customer accounts with a combined balance
of P365,000. Annette stratified the population of accounts so that all balances equal to or greater than P2, 000
were selected for confirmation. From the remaining 420 accounts, she drew a random sample of 50 accounts.
Annette then mailed positive confirmation requests to the 80 customers. Working Paper 1 summarizes the
confirmation replies.

Required:
a. Comment on the adequacy of Annette's workpaper as presented in Working Paper 1.

b. Assuming all amounts are considered material, draft any audit adjustments that you consider necessary.
Include journal explanations. (Assume that Monty's Meat maintains perpetual inventory records.)

c. Working Papers 2 and 3 reproduce the audit workpapers for the "accounts receivable aging analysis"
and "'allowance for uncollectible accounts," respectively:

1) Using two separate sheets of paper, reproduce on the first workpaper the last line of Working
Paper 2, which represents the aged totals of Monty's Meat's accounts receivable. On the second
workpaper, reproduce the last line of Working Paper 3, the October 31 general ledger balance in
allowance for doubtful accounts. Add an audit legend describing how Annette obtained the
balance in accounts receivable.

2) Post your adjustments from question (b) to the two workpapers.

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3) Record subsequent collections on the aging analysis, assuming the following cash receipts for
the period 11/1/2017 through 11/27/2017:

Current P210,113
1-30 days past due 13,353
Total P223,466

4) Add an audit legend describing the procedures you would apply to the subsequent collections.

5) Calculate estimated uncollectible accounts receivable on the aging analysis, assuming that the
following percentages adjusted for current observable data on collectibility of records are used by
Monty's Meat, and have been agreed to by the auditors:

Current 10%
Past due: 1-30 days 25%
31-60 days 70%
Over 60 days 100%

6) Evaluate the adequacy of the allowance for doubtful accounts and record any necessary audit
adjustment on the allowance for doubtful accounts workpaper.

7) Add an audit legend presenting your conclusion regarding the adequacy of the allowance for
doubtful accounts.

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ACCT 1093 - Auditing and Assurance: Concepts and Applications 1| 4
PROBLEM 4 – Aging Analysis
The Accounts Receivable control account balance of PINTEREST Company was P264,000 as of December 31,
2020. The subsidiary ledger accounts of the company are summarized below. Credit terms are 60 days net.

Account Number Date Debit Credit Balance

1 May 31 8,000 8,000
July 1 4,000 4,000
7 5,000 9,000
Sept. 1 3,000 6,000
25 8,000 14,000
Nov. 1 3,000 11,000
Dec. 10 3,000 14,000

2 Aug 8 12,000 12,000

Oct. 4 12,000 0
Nov. 25 25,000 25,000

3 (Three-month, 8% note) Jan. 1 100,000 100,000

Mar 31 102,000 2,000 cr.

(Two-month, 9% note) Dec 1 100,000 98,000

4 Feb 3 20,000 20,000

Aug 3 24,000 44,000

5 Feb 10 30,000 30,000

Apr 9 30,000 0
May 4 40,000 40,000
July 2 40,000 0
Sept 6 60,000 60,000
Nov 25 8,000 68,000

6 July 17 5,000 5,000

Aug 16 4,000 9,000
Sept. 30 open 15,000 24,000
Oct 15 9,000 15,000
18 6,000 21,000
Dec. 20 6,000 15,000

The allowance for uncollectible accounts, before audit, has a credit balance of P8,000. The Allowance for
Uncollectible Accounts is to be adjusted to balance determined as follows:

Accounts not due 1 percent

Accounts 1-60 days past due 2 percent
Accounts 61-120 days past due 5 percent
Accounts over 120 days past due 50 percent

The allowance for uncollectible accounts is to be based only on the trade accounts. Except where payments are
earmarked, the oldest items are paid first.

Required:
a. Prepare audit work papers for aging the accounts receivable. In your schedule, show also
the disposition and any remarks, which you as the auditor would note.
b. Show the necessary audit adjustments as at December 31, 2020.

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PROBLEM 5 – Review of Collectibility of Accounts Receivable
Presented below is information related to the Accounts Receivable accounts of TESLA, Inc, during the current
year 2020.
a. An aging schedule of the accounts receivable as of December 31, 2020 is as follows:

Aqe Net Debit Balance % to be Applied After Correction Made

Under 60 days P175,000 1%

61 - 90 days 80,000 3%
91 - 120 days 42,000 6%
Over 120 days 24,000 P4,200 definitely uncollectible;
remainder estimated 25%
uncollectible.

b. The Accounts Receivable control account has a debit balance of P321,000 on December 31,
2020.

c. Two entries were made in the Uncollectible Accounts Expense account during the year:
1) a debit on December 31 for the amount credited to Allowance for Uncollectible Accounts,
and
2) a credit for P2,740 on November 3, 2020, and a debit to Allowance for Uncollectible
Accounts because of a bankruptcy. The P2,740 write off of receivables is related to the
91-120 day category.

d. The Allowance for Uncollectible Accounts is as follows for 2020:

Date Particulars Debit Credit Balance

Jan. 1 Beginning balance P 8,750
Nov. 3 Write off P 2,740 6,010
Dec. 31 Provision (5% of P321,000) P 16,050 22,060

e. A credit balance exists in the Accounts Receivable (61-90 days) of P4,800, which represents an
advance on a sales contract.
Required:
a. Audit adjusting entries at December 31, 2020.
b. Compute the correct balances of Accounts Receivable and Allowance for
Uncollectible Accounts at December 31, 2020.
c. Compute the correct amount of Uncollectible Accounts Expense for the year 2020.

PROBLEM 6 – Sales Cut-off

You were engaged to perform an audit of the accounts of the WALMART Corp for the year ended December 31,
2020 and have observed the taking of the physical inventory of the company on December 30, 2020. Only
merchandise shipped by the WALMART Corp to customers up to and including December 30, 2020 have been
eliminated from inventory. The inventory as determined by physical inventory count has been recorded in the
books by the company's controller. No perpetual inventory records are maintained. All sales are made on an
FOB shipping point basis. You are to assume that alt purchase -invoices have been correctly recorded.
The following lists of sales invoices are entered in the sales books for the months of December 2020 and January
2021, respectively.
Sales Invoice Sales Cost of Date Shipped
Amount Invoice Date Goods Sold
December, 2020 a. P 30,000 Dec. 21 P 20,000 Dec. 31, 2020
b. 22,000 Dec. 31 18,000 Dec. 31, 2020
c. 10,000 Dec. 29 6,000 Dec. 30, 2020
d. 40.000 Dec. 31 24,000 Jan. 3. 2021
e. 100,000 Dec. 30 56,000 Dec. 29, 2020 (shipped to consignee) *
f. 120,000 Dec. 30 80,000 Jan. 2, 2021
January, 2021 g. 60,000 Dec. 31 40,000 Dec. 30, 2020
h. 40,000 Jan. 2 23,000 Jan. 2, 2021
i. 80,000 Jan. 3 55,000 Dec. 31, 2020
j. 90,000 Jan. 4 64,000 Dec. 29, 2020

* Verification from the consignee indicates that 60% of the merchandise is still unsold at December 31, 2020.

Required: Prepare the necessary adjusting journal entries at December 31, 2020 in connection with the
foregoing data.

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PROBLEM 7 – Notes Receivable Working Paper Preparation and Analysis of Related Accounts

During the course of the audit of the financial statements of Moore, Inc., for the year ended December 31,
2019, you examined the notes receivable represented by the following items:

1. A four-month note dated November 30, 2019, from the Aeon Company, P 10,000; interest rate, 16
percent; discounted on November 30, 2019, at 16 percent.

2. A draft drawn payable 30 days after date for P45,000 by the Benton Company on the Dodge Company
in favor of the Gerrard Company, endorsed to Moore, Inc., on December 2, 2019, and accepted on
December 4, 2019.

3. A 90-day note dated November 1, 2019, from J.C. Cruz of P25,000; interest at 16 percent; the note is
for subscriptions to 250 preference shares of Moore, Inc., at PI 00 per share.

4. A 60-day note dated May 3, 2019, from the National Investment Company, P30,000; interest rate, 16
percent; dishonored at maturity; judgment obtained on October 10, 2019. Collection doubtful. (No
interest after maturity.)

5. A 90-day note dated January 4, 2019, from Romeo Paz, president of Moore, P8,000; no interest; not
renewed; president confirmed.

6. A 120-day note dated September 14, 2019, from the Samson Company, P6,000; interest rate, 16
percent; note is held by bank as collateral.

Where the company discounted a note, -Interest Expense was debited for the discount cost and Interest
Income was credited for the revenue.

Requirements:
From the information presented, prepare the following:
a. Working papers for Notes Receivable as of December 31, 2019.
b. All necessary audit adjustments, including entries for interest accrued and prepaid.
c. Statement of financial position presentation of the notes receivable as of December 31, 2019.

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PROBLEM 8 – LONG-TERM NON-TRADE RECEIVABLE
SUNCOR, Inc.; had the following long-term receivable account balances at December 31, 2019:

Note receivable from sale of division P 1,500,000

Note receivable from officer 400,000

Transactions during 2020 and other information relating to SUNCOR's long-term receivables were as follows:

1. The P 1,500,000 note receivable is dated May 1, 2019, bears interest at 9%, and represents the balance
of the consideration received from the sale of SUNCOR's electronics division to Ally Company. Principal
payments of P500,000 plus appropriate interest are due on May 1, 2020, 2021, and 2022. The first
principal and interest payment were made on May 1, 2020. Collection of the note installments is
reasonably assured.

2. The P400,000 note receivable is dated December 31, 2012, bears interest at 8%, and is due on
December 31, 2022. The note is due from Richard Cage, president of SUNCOR, Inc., and is collateralized
by 10,000 shares of SUNCOR's ordinary shares. Interest is payable annually on December 31, and all
interest payments were paid on their due dates through December 31, 2020. The quoted market price of
SUNCOR's ordinary share was P45 per share on December 31, 2020.

3. On April 1, 2020 SUNCOR sold a patent to Nell Company in exchange for a P 100,000 non-interest-
bearing note due on April 1, 2022. There was no established exchange price for the patent, and the note
had no ready market. The prevailing rate of interest for a note of this type at April 1, 2020 was 15%. The
present value of P1 for two periods at 15% is 0.756. The patent had a carrying value of P40,000 at
January 1, 2020, and the amortization for the year ended December 31, 2020 would have been P8,000.
The collection of the note receivable from Nell is reasonably assured.

4. On July 1, 2020 SUNCOR sold a parcel of land to Elaine Company for P200,000 under an installment
sale contract. Elaine made a P60,000 cash down payment on July 19, 2020 and signed a 4-year, 16%
note for the PI 40,000 balance. The equal annual payments of principal and interest on the note will be
P50,000, payable on July 1, 2021 through July 1, 2024. The land could have been sold at an established
cash price of P200,000. The cost of the land to SUNCOR was P 150,000. Circumstances are such that
the collection of the installments on the note is reasonably assured.

Required:
1. Prepare the long-term receivables section of SUNCOR's statement of financial position at
December 3 1, 2020.
2. Prepare a schedule showing the current portion of the long-term receivables and accrued interest
receivable that would appear in SUNCOR's statement of financial position at December 31, 2020.
3. Prepare a schedule showing interest income from the long-term receivables and gains recognized
on sale of assets that would appear on SUNCOR's income statement for the year ended December
31, 2020.

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