Chapter 10: Substantive Tests of Receivables and Sales

10-8. Audit of Accounts Receivable and Allowance for Doubtful Accounts

Required:

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

The description of the auditing procedures performed when confirming the accounts is not
included in the workpaper. The workpaper is also incomplete in the following areas:
1) The workpaper does not indicate whether the auditor traced the remittance of P3,000
to November cash receipts through ABC Grocery.
2) The workpaper does not indicate whether the auditor checked the credit memo given to
the Sari-Sari store on November 2.
3) The workpaper does not indicate whether the auditor traced the remittance to
November cash receipts from the Lucena's Meat Market.
4) The workpaper does not indicate whether and how the auditor achieved compliance
with the non-returned requests for confirmation.
5) The workpaper does not indicate whether the auditor inspected the Diana's Supper Club
order documents returned and received on October 31.
6) These confirmations should have been listed individually, rather than summarizing the
confirmations returned without exception, as was done at the bottom of 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.)

1) Sales P11,110
Accounts Receivable P11,110

Inventory 8,600
Cost of Goods Sold 8,600

To revert 2017 sale recorded in 2016.

2) Allowance for uncollectible accounts 1,277

Accounts Receivable 1,277

To write off uncollectible amount.

 3) Sales Returns and Allowances 3,634
Accounts Receivable 3,634

To record the return of spoiled meat and to recognize

loss in period in which incurred.

4) Sales 13,000
Accounts Receivable 13,000

To correct the error in recording the customer

remittance as a sale.

5) Sales Returns 334

Accounts Receivable 334

Inventory 250
Cost of Goods Sold 250

To record return and to restore the meat to

inventory because the meat is returned in a
a good condition.

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 P365,000 balance in accounts receivable.
2) Post your adjustments from question (b) to the two workpapers.
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 collectability
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.

** CHECK EXCEL FILE ATTACHED FOR MY ANSWER IN LETTER C. **

10-9. Accounts Receivable Confirmation Follow-up

Required: What steps would you take to clear satisfactorily each of the 11 comments?

1) We are sorry but we cannot answer your request for confirmation of our account as the PDQ
Company uses an accounts payable voucher system.

a) Examine the supporting documents for the ownership and valuation of the sales,
including sales invoices and related sales and shipping orders.
b) Audit the books on cash receipts for the period after December 31, 2016 and recognize
any PQC Company collections. In determining the reliance that can be placed on cash
receipt entries, the degree of internal control over cash receipts should be an important
consideration. Furthermore, in the absence of any assurance that collections after
December 31 reflect the payment of invoices supporting the trial balance of December
31, consideration should be given to the request for confirmation by the PDQ Company
of invoices payable on the basis of their checks.

2) The balance of P1,050 was paid on December 23, 2016.

a) The problem should be investigated intensively. If the credit has been posted to the
wrong account, it may simply imply a clerical error. The posting to the wrong account,
on the other hand, may indicate lapping.
b) Such comment may also imply a delay in the receipts' posting and depositing. If this is
the case upon investigation, the company should be immediately notified so that
corrective steps can be taken.

3) The balance of P7,750 was paid on January 5, 2017.

 With an additional comment, this is a confirmation of the balance. Since the customer
provided us with the information, it is easier to verify to see if the information agrees with the
records of the company. In recording receipts, such a procedure can disclose misposting or
delay.

4) The balance noted above has been paid.

An immediate question should emerge from this incomplete comment: does the
customer say that he paid before or paid after December 31? Since the intent of the customer is
unclear, this account should be reconfirmed, and the customer demanded that the exact date
be specified. The information thereon should be traced to the cash receipts book upon receipt
of the second confirmation.

5) We do not owe you anything at December 31, 2016, as the goods, represented by your invoice
dated December 30, 2016, number 25050, in the amount of P11,550 were received on January
5, 2017, on FOB destination terms.

First the auditor should determine how long it takes to ship items to the customer in
question. There is no sign of error if it usually takes longer than five days. A statement of this
sort may suggest that before an actual transaction has taken place, the company may be
tracking sales. The auditor should verify the invoice and discuss the company's policies with the
higher authorities. If the title has not passed to the buyer as of December 31, 2016, revenue,
sales prices, inventories, and receivable accounts will have to be changed.

6) An advance payment of P2,500 made by us in November 2016 should cover the two invoices
totaling P1,350 shown on the statement attached.

a) Determine that the advance payment was received and that it was recorded properly.
To check that charges against such advances have been properly managed, a summary
of other payments should be made.
b) The auditor should recommend a reclassification of the P1,350, debiting the advance
payment account and credit accounts receivable - trade if the advance payment were to
cover the invoices.

7) We never received these goods.

a) Review the shipping order for evidence that the goods were shipped and if applicable,
the invoice of the carrier and/or bill of lading for the goods to be sent.
b) If it indicates that goods have been shipped, send the customer all available
information, and ask the customer to verify it. If the customer still claims that goods
were never received, for a full clarification, all data should be presented to an
appropriate company official. This may imply that shipment accounting is insufficient,
 and attention should be given to reviewing the procedures to determine if changes can
be made.
c) If the goods have not been shipped, the auditor should propose an adjustment that
decreases revenue, cost of sales, and accounts receivable and increases inventories.

8) We are contesting the propriety of this P12,525 charge. We think the charge is excessive.

This should be discussed with the appropriate officials and the customer's
correspondence should be checked in order to decide if a change should be made to the
account receivable or whether an allowance for doubtful accounts should be created.

9) Amount okay. As the goods have been shipped to us on consignment, we will remit the
payment upon selling the goods.

As the title of any goods shipped on consignment does not pass before such goods are
sold, whether it is indeed a consignment sale, the sales entry should be reversed, inventory
credited, and cost sales credited. Such so-called sales and company officials were asked to
decide if such sales actually constitute consignment shipments; if so, all consignment shipments
should be subject to the adjustment provided for in the preceding sentence.

10) The P10,000, representing a deposit under a lease, will be applied against the rent due to us
during 2018, the last year of the lease.

This is a non-current asset, and either deposit or prepaid rent should be reclassified.
Other accounts that should be reclassified may be identified by an audit of other accounts
especially those with round numbers.

11) Your credit memo dated December 5, 2016, in the amount of P440 cancels the balance above.

This can suggest a misposting of the credit or a delay in the credit being released. The
statements referred to in number 2 above will also apply to credits.