A.P. M-1403 Audit of Receivables Multiple Choice Questions -Theor 1. The purpose of test of controls over billing is to determine whether A. billed goods have been shipped B. shipments are billed billed C. billing department personnel are competent D. credit is approved before goods are shipped
2. Proper authorization of writeoffs of uncollectibles should be approved in which of the following department! A.Accounts "eceivable B.Credit C.Accounts Pa#able D.Treasurer $. The purpose of tests of controls over shipping is to determine whether A.Billed goods have been shipped B.%hipments are billed C.%hipping department personnel are competent D.Credit is approved before goods are shipped &. 'hich of the following might be detected b# an auditor(s review of the client(s sales cutoff! A.)*cessive goods returned for credit B.+nrecorded sales discount C.,apping of #earends accounts receivable D.-nflated sales for the #ear . An auditor most li/el# would review an entit#(s periodic accounting for numerical se0uenc e of shipping documents and invoices to support suppo rt management(s financial statement assertion of A.)*istence or occurrence B.aluation C."ight and obligation D.Completeness . An inappropriate audi# ob3ective relative to accounts receivable is to determine that A.The accounts e*ist e*ist and are properl# valued B.The client has rights in the receivable C.The accounts represent represent the complete transaction process D.The accounts are collected collected b# the balance sheet sheet date 4. All of the following are e*amples of substantive substantive tests to verif# valuation of net accounts receivable e*cept the A."ecomputation if allowance for bad debts B.-nspection of accounts for current current versus noncurrent status status in the statement of financial position
C.-nspection of aging schedule and credit records of past due accounts D.Comparison of tge allowance for bad debts with past records 5.Confirmation6which is a specific t#pe of in0uir#6is the process of obtaining a representation of information or of an e*isting condition directl# from a third part#. Two assertion for which confirmation of accounts receivable balances provides primar# evidence are A.Completeness and valuation B."ights and obligation e*istence C.aluation and rights and obligations D.)*istence and completeness 7. An auditor who has confirmed accounts receivable ma# discover that the sales 3ournal was held open past #earend if A.Positive confirmations sent to debtor are not returned B.8egative confirmations sent to debtors are not returned l C.9ost of the returned negative confirmations indicate that the debtor owes larger balance that the amount being confirmed D.9ost of the returned positve confirmations indicate that the debtor owes a smaller balance that the amount being confirmed. 1:. The auditor finds situation in which one person has the abilit# to collect receivables6ma/e deposits6issue credit memos and record receipt if pa#ments. The auditor suspects the individual ma# be stealing from cash receipts. 'hich of the following audit procedures would be most effective in discovering fraud in this scenario! A.%end positive confirmations to all random selection of customers B.%end negative confirmations to all outstanding accounts receivable customers C.Perform a detailed review of debits to customer discounts6sales returns6 or other debit accounts e*cluding cash posted to the cash receipts D.Ta/e a sample of ban/ deposits and trace the detail in each ban/ deposit bac/ to the entr# in the cash receipta 3ournal
11. The positive re0uest form of accounts receivable confirmation ma# be used when the
A.
B. C. D.
Combined Assessed ,evel of -nherent and Control "is/ is
-ndividual Account "eceivable Balance are
, , ; ;
, % % ,
o o i i
g g
w w h h
a m m a
r a a r
g l l g
e l l e
12. The negative re0uest form of accounts receivable confirmation ma# be used whan the Combined Assessed ,evel of -nherent and Control "is/s 8umber of %mall Balances -s Consideration b# the "ecipient A . , o w 9 a n # , i / e l # B . , o w < e w + n l i / e l # C . ; i g h < e w , i / e l # D . ; i g h 9 a n # , i / e l #
1$. 'hich of the following is the greatest drawbac/ of uaing the subse0uent collections evidenced onl# b# a deposit slip as an alternative procedure when responces to positive accounts receivable confirmation are not received! A.Chec/ing of subse0uent collections can never be used as an alternative auditing procedure B. B# e*aminin# a deposit slip onl#6the auditor does not /now whther the pa#ment is for the receivable at the balance sheet date or subse0uent transaction C.A depositor slip is not received directl# b# the auditor D.A customer ma# not have made a pa#ment in a timel# basis. 1&. Confirmation of accounts receivable is generall# accepted auditing procedure. The presumption that an auditor will confirm accounts receivable is not overcome if A.Based on a prior #ear(s audit e*perience response rates will be inade0uate B.Based in e*perience with similar engagements6 responses are e*pected to be unreliable C.The accounts receivable are immaterial D.The combined assessed level of inherent and control ris/ is high 1.'hich of the following procedures would an auditor most li/el# perform for #earend accounts receivable confirmations when the auditor did not receive rep/ies ti second re0uest! A."eview the cash receipts 3ournal for the month prior to #earend B.-ntensif# the stud# of internal control concerning revenue c#cle C.-ncreased the assessed level of detection ris/ for e*istence assertion D.-nspect the shipping records documenting the merchandise sold to the debtors 1.An auditor should perform alternative procedures to substantiate the e*istence of accounts receivable when A.8o repl# to a positive confirmation re0uest is received B.8o repl# to a negative confirmation re0uest is received C.Collectibilit# of the receivables is in doubt D.Pledging of the receivables is probable 14.An auditor(s purpose in reviewing credit ratings of customers with deli0uent ac counts receivable most li/el# is to obtain evidence concerning management(s assertion about A.aluation or allocation B.Presentation and disclosure C.)*istence and occurence
D."ights and obligations 15. An aged trial balance of accounts receivable is usuall# used b# the auditor to A.erif# the validit# of recorded receivables B.)nsure that all accounts are promptl# credited C.)valuate the results of compliance test D.)valuate t#pe of provision for bad debt e*pense 17. -n verif#ing a 8ovember $:6 2:11 sales cut off date 6 an auditor would be most cincerned wuth comparing records of A.8ovember 2:11 cash receipts with December 2:11 ban/ deposits B.8ovember 2:11 purchases with December 2:11 shipments C.8ovember 2:11 accounts receivable with 8ovember2:11 sales D.8ovember 2:11 sales with 8ovember 2:11 shipping documents 2:. To conceal defalcation involving receivables6 the auditor would e*pect an e*perienced boo//eeper to charge which of the following accounts A.9iscellaneous income B.Pett# cash C.9iscellaneous e*pense D.%ales returns
!trai"ht Proble#s Proble# 1
=our audit disclosed that on December $162:1&6 the accounts receivable control account of Ba#ot Co. had a balance of P16&$26::. An anal#sis of the accounts receivable account showed the following> Accounts /nown to be worthless Advance pa#ments to creditors on purchase orders Advances to affiliated companies Customers( accounts reporting credit balances arising from sales return -nterest receivable on bonds ther trade accounts receivable unassigned %ubscription receivable due in $: da#s Trade accounts receivable assigned ?Ba#ot Co.(s e0uit# in assigned accounts is P46:::@ Trade installment receivable due 115 months6 including unearned finance charges of P16::: Trade acounts receivables from officers due currentl# Trade accounts receivable on which postdated chec/ are held ?no entries
1564: 46::: 1546:: ?1126::@ 46::: &126:: 1546:: 16::: 1162: $46::
were made on receiipts of chec/s@
"e0uired> a. Trade accounts receivable balance as of December $162:1&. P4162: b. 8et current trade and other receivables balance as if December $162:1&. P$2$64: c. ;ow much will be presented under noncurrent assets as of December $162:1&! P1546::
Proble# $
=ou were engaged to perform an audit of the accounts of ;eid# Corporation for the #ear ended December $162:1& and have observed the ta/ing of the ph#sical inventor# count of the compan# on December $:62:1&. nl# merchandise shipped the ;eid# Corporation to customers up to end including December $:62:1& has been eliminated from inventor#. The inventor# as determined b# ph#sical inventor# count has been recorded on the boo/s b# the compan#(s controller. 8o perpetual records are maintained. All sales are made on
a. Adjusting entries as of "ecember #1, 2014. 1. Sales return 184, 000 Accounts receivable 184, 000 2. No adjusting entries #. $eceivable from carrier #20, 000 Accounts receivable #20, 000 4. Sales 80, 000 Accounts receivable 80, 000 %. No adjusting entries 6. &ash 248, 000 Accounts receivable 248, 000 '. A$(")S 80, 000 A$(*c"onald 80, 000 8. Accounts receivable #20, 000 Sales $eturn #20, 000 b. Adjusted balance of Accounts receivable( +rade as of "ecember #1, 2014. #, %28, 000
P"B,)9 & The following information is based on the first audit Tomm# Pogi Comapan#. =our new client has not prepared financial statements for three #ears since December $16 2:1&. The compan# used accrual basis of accounting and reported income on a calendar #ear basis prior to 2:1. During the three #ears since December $16 2:1& his cash receipts and cash disbursements records were maintained and sales on account were entered6 when made6 directl# into an accounts receivable subsidiar# ledger. ;owever6 no general ledger postings have been made since the December $16 2:1&. =our e*amination has disclosed balances at the beginning and the end of three#ear period. Dec. $16 2:1&
Aging of accounts receivable ((( -ess than1 ear old 1 to 2 ears old 18, 000 2 to 8, 000 +otal accounts receivable #08, 000 )nventories 188, 000
Dec. $16 2:14
1'6, 120 282, 000 12, 000 #
ears
old 188, 120 116, 000
Accounts receivable( merchandise inventor 110, 000
%0, 000
/ou have satised ourself as to the accurac of the balances shon above. ther information available to is as follos3
&ash received on account((( Alied to ((( &urrent ears accounts rior5s ear5s audit Accounts of to ears rior +otal &ash sales "isbursement for merchandise urchase
201%
2016
201'
1, 480, 000
1, 618, 000 1%0, 000 4, 000
2, 088, 000 168, 000 20, 000
1, ''2, 000 260, 000 1,412,000
2, 2'6, 000 #12, 000 1,'#8, 000
1#4, 000 %0, 120 1, 664, 120 1'0, 000 1,'!2,%00
No account balances have been ritten o as uncollectible during the three(ear eriod and the ratio of gross rot to sales remains constant from ear to ear. $e7uired 1. &omute the total sales for each ear 201% to 201'. 6,%'4,000 2. hat is the average gross rot rate9 2%: #. &omute the gross rot for each ear 201% to 201'. 201% ( 4%1, 000 ; 2016 < %16, 000 ; 201' < 6'0, %00
P"B,)9 =ou sent out positive confirmation re0uest to customers of )rnell# Corporation on December $16 2:1&. "eplies disputing amounts shown on the statements are summarized below. Confirmation
8o. 14
CustomerFs Comments Chec/ for P16 2:: was mailed on December $:6 2:1& oods should have been billed at 5:E of P6 ::: retail price since we received them on consignment. 'e returned the goods on 12H:$H1&
&:
$
45
'e do not owe the amount of P26 ::: Per our telephone conversation6 #ou agreed to reduce the price b# :E since some of the goods were damaged. The balance of P26 :: was paid on December 2$6 2:1& per #our official receipt 8o. 754. "eturned merchandise amounting to P126 ::: on December 26 2:1&.
112
11$
Audit findings Chec/ received 1H&H1 and credited on that date Pricing polic# confirmed b# sales manager. The cost of consigned goods amounts to P$6 ::. )*amined receiving report for returned goods. Credit memo for P6 ::: dated 12H:4H2:1& in advertentl# not recorded. "eceived sales documentation confirmed a posting error. Credit manager agreedI credit memo for P26 :: will be issued in anuar# 2:1.
Amount was erroneousl# credited to subsidiar# ledger account of 8ell# instead of )rnel. 9erchandise was included in the inventor#6 P46 2::. Credit memo was issued on anuar# $6 2:1. "educe #our bill b# P26 :::. - %pecial discount of 2:E am entitled to a special confirmed b# sales manager. discount of 2:E. ). nell# is an emplo#ee of
122
1$5
)rnell# Corporation. %ale was made in the ordinar# course of business and granting of credit passed through the routine process. 1 The goods worth P6 ::: were oods shipped Based on the above and the result of #our audit6 answer the following>
1. >o much is the adjusted balance of accounts receivable as of "ecember #1, 201#9 %##, 800 2. >o much is the adjusted balance of the alloance for doubtful accounts as of "ecember #1, 201#9 2%,4'%
#. >o much is the doubtful accounts e?ense for the ear 201#9 20, 8'% 4. >o much is the net adjustment to the doubtful accounts e?ense account9 )ncrease b 14, !20 P"B,)9 7 -n connection with the audit of the financial statements of Charm Corporation6 #our audit senior instructed #ou to e*amine the compan#Fs accounts receivable. Prior to an# ad3ustments #ou were able to e*tract the following balances from CharmFs trial balance as of December $16 2:1$> Accounts receivable Allowance for doubtful accounts
P 16 $246 :: &6 :::
Accounts with debit balances> : da#s old and below P416 :: 1 to 7: da#s $16 :: ver 7: da#s 262:: P16 $2&6 2:: Advances to officers &76 2:: Accounts with credit balances ?&6 :::@ Accounts receivable per , P16 $246 :: The credit balance in customerFs account represents collection from a customer whose account had been written of as uncollectible in 2:12. Accounts receivable for more than a #ear totaling P$6 ::: should be written off. Confirmation replies received directl# from customers disclosed the following e*ceptions>
Customer %wernette
"amil
CustomerFs comment The good sold on December 1 were returned on December 16 2:1$
Audit findings The client failed to record credit memo no. 2$ for P$6 :::. The merchandise was included in the ending inventor# at cost. 'e do not owe this amount -nvestigation revealed that EJK ?bad
[email protected] did not goods sold for P&56 ::: were receive an# merchandise from shipped to "amil on December #our compan# 276 2:1$6 terms
1. +he adjusted balance of accounts receivable in the 60 das and belo categor as of "ecember #1, 201#. 61', 400 2. +he adjusted balance of accounts receivable as of "ecember #1, 201#. 1, 162, 200 #. +he adjusted alloance for doubtful accounts as of "ecember #1, 201#. 22, 866 4. +he entr to adjust the alloance for doubtful accounts. Alloance for doubtful accounts 4, 1#4 "oubtful accounts e?ense 4, 1#4
%. +o gather audit evidence about the roer credit aroval of sales, the auditor ould selects a samle of documents from the oulation reresented b the a. Bill of lading b. &ustomer order le c. Sales invoice le d. Subsidiar customers5 account ledger
P"B,)9 1: During the course of the audit of the financial statements of 8ovel#ns/#6 -nc. for the #ear ended December $16 2:1$6 #ou e*amined the Trade 8otes receivable account represented b# the following items>
a. A four(month note dated November #0, 201# from the $uth &o., 100, 000; interest rate, 10: discounted ithout recourse on November #0, 201# at 8:. Novelns recorded the roceeds received as a credit to -iabilit on "iscounted Notes. b. A !0(da note dated November 1, 201# from rnel, 2%0, 000; interest rate 8:; the note is for subscritions to 2, %00 shared of the reference share caital of Novelns, )nc. at 100 er share. c. A 60 da note dated *a #, 201# from >eid &oman #0, 0003 interest rate, 6:; dishonoured at maturit; judgement obtained on ctober 10, 201#, collection doubtful. d. A one(ear noted dated Canuar #1, 201# from the resident of Novelns, )nc. 800, 000; no interest; resident conrmed. *aret rate of the note on Canuar #1, 2012 as !:. e. A 120(da note dated Setember 14, 201#, from "ragon &oman, 60, 000; interest rate, !:, note is held b ban as collateral. f. A to ear non(interest bearing note from Beth &oman for 200, 000 received abGnd dated August #1, 201#. +he note as received in e?change for an agreement sold. +he e7uiment had a original cost of 400, 000 and had an accumulated dereciation on Canuar 1, 201# of 160, 000. Such e7uiment is being dereciated at rate of 10: a ear, rounded to the nearest month. +he revailing interest rate for a note of this te is 12:. Novelens recorded the sale b debiting notes receivable and crediting e7uiment of the face value of the note. No dereciation has et been rovided on this e7uiment for the ear 201#.
R!"#$R!D:
1. &orrect balance of +rade Notes $eceivables and Accrued )nterest. 2. Audit adjustments entries at "ecember #1, 201#.
