PHILIPPINE CHRISTIAN UNIVERSITY
College of Business Administration and Accountancy
AUDITING THEORIES
AUDIT OF RECEIVABLES
1. Which of the following statements would an auditor most likely add
to the negative form of confirmation of accounts receivable to
encourage timely consideration by the recipients?
a. “This is not a request for payment; remittances should not be
sent to our auditors in the enclosed envelope.”
b. “Report any differences on the enclosed statement directly to
our auditors; no reply is necessary if this amount agrees
with your records.”
c. “If you do not report any differences within fifteen days, it
will be assumed that this statement is correct.”
d. “The following invoices gave been selected for confirmation
and represent amount that are overdue.”
2. All of the following are examples of substantive test to verify
the valuation of net accounts receivable except the
a. Recomputation of the allowance for bad debts
b. Inspection of accounts for current versus noncurrent status
in the statement of financial position
c. Inspection of the aging schedule and credit records of past
due accounts
d. Comparison of the allowance for bad debts with past records
3. To reduce the risks associated with accepting fax responses to
request for confirmation of accounts receivable, an auditor most
likely would
a. Examine the shipping documents that provide evidence for the
existence assertion
b. Verify the sources and contents of the faxes in telephone
calls to the senders
c. Consider the faxes to be nonresponses and evaluate them as
unadjusted differences
d. Inspect the faxes for forgeries or alterations and consider
them to be acceptable if none are noted
4. Which of the following procedures concerning accounts receivable
would an auditor most likely perform to obtain evidential matter
in support of an assessed level of control risk below the maximum
level?
a. Observing an entity’s employee prepare the schedule of past
due accounts receivable
b. Sending confirmation requests to an entity’s principal
customers to verify the existence of accounts receivable
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PHILIPPINE CHRISTIAN UNIVERSITY
College of Business Administration and Accountancy
c. Inspecting an entity’s analysis of accounts receivable for
unusual balances
d. Comparing an entity’s uncollectible accounts payable to
actual uncollectible accounts receivable
5. Which of the following procedures most likely would not be an
internal control designed to reduce the risk of errors in the
billing process?
a. Comparing control totals for shipping documents with
corresponding totals for sales invoices
b. Using computer programmed controls on the pricing and
mathematical accuracy of sales invoices
c. Matching shipping documents with approved sales orders before
invoice preparation
d. Reconciling the control totals for sales invoices with the
accounts receivable subsidiary ledger
6. Which of the following statements about receivables confirmation
is correct?
a. Under positive confirmation, the customer is request to
confirm the accuracy of the balance stated or state in what
respect he disagrees
b. The receivables’ confirmation has to take place immediately
after the year-end
c. Receivables’ confirmation letters are sent by the auditor on
the audit firm’s headed notepaper
d. The receivables’ confirmation provides assurance as to the
valuation of year-end receivable balances
7. An auditor tests an entity’s control of obtaining credit approval
before shipping goods to customers in support of management’s
financial statement assertion of
a. Valuation or allocation
b. Completeness
c. Existence or occurrence
d. Rights and obligations
8. Which of the following most likely would give the most assurance
concerning the valuation assertion of accounts receivable?
a. Vouching amounts in the subsidiary ledger to details on
shipping documents
b. Comparing receivable turnover ratios with industry statistics
for reasonableness
c. Inquiring about receivables pledged under loan agreements
d. Assessing the allowance for uncollectible accounts for
reasonableness
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PHILIPPINE CHRISTIAN UNIVERSITY
College of Business Administration and Accountancy
9. The most likely result of ineffective internal controls in the
sales cycle is that
a. Fictitious transactions could be recorded, causing an
understatement of revenues and an overstatement of
receivables
b. Irregularities in recording transactions in the subsidiary
accounts could delay the shipment of goods
c. Omission of shipping documents could go undetected, causing
an understatement of inventory
d. Final authorization of credit memos by personnel in the sales
department could permit an employee defalcation scheme
10. Which of the following strategies should give an auditor the
strongest assurance as to existence of trade receivables year-end
balances, in a company with weak internal controls, over sales and
trade receivable functions?
a. Carrying out a positive circularization of receivable
balances in respect of the year-end balances
b. Carrying out a negative circularization of receivables in
respect of year-end balances
c. Confirming receivable balances by agreeing to sales invoices,
authorized delivery receipts and customer orders
d. Confirming receivables balances by verifying subsequent
payments after year-end
11. Which of the following is the greatest drawback of using
subsequent collections evidenced only by a deposit slip as an
alternative procedure when responses to positive accounts
receivable confirmations are not received?
a. Checking subsequent collections can never be used as an
alternative auditing procedure
b. By examining a deposit slip only, the auditor does not know
whether the payment is for the receivable at the balance sheet
date or a subsequent transaction
c. A deposit slip is not received directly by the auditor
d. A customer may not have made a payment on a timely basis
12. The auditors’ analysis of the clients aged accounts
receivable schedule is consistent with the auditor’s objective of
validating client’s receivable assertion on:
a. Existence
b. Completeness
c. Rights and obligation
d. Valuation
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PHILIPPINE CHRISTIAN UNIVERSITY
College of Business Administration and Accountancy
13. 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
b. Rights and obligations
c. Valuation and allocation
d. Completeness
14. Negative confirmation of accounts receivable is less
effective than positive confirmation of accounts receivable because
a. A majority of recipients usually lack the willingness to
respond objectively
b. Some recipients may report incorrect balances that require
extensive follow-up
c. The auditor cannot infer that all non-respondents have
verified their account information
d. Negative confirmations do not produce evidence that is
statistically quantifiable
15. In confirming accounts receivable, an auditor decided to
confirm customers’ account balances rather than individual
invoices. Which of the following most likely would be included with
the client’s confirmation letter?
a. An auditor-prepared letter explaining that a non-response may
cause inference that the account balance is correct
b. A client-prepared letter reminding the customer that a non-
response will cause a second request to be sent
c. An auditor-prepared letter requesting the customer to supply
missing and incorrect information directly to the auditor
d. A client-prepared statement of account showing the details of
the customer’s account balance
16. An auditor who has confirmed accounts receivable may discover
that the sales journal was held open past year-end if
a. Positive confirmations sent to debtors are not returned
b. Negative confirmation sent to debtors are not returned
c. Most of the returned negative confirmations indicate that he
debtor owes a larger balance than the amount being confirmed
d. Most of the returned positive confirmations indicate that the
debtor owes a smaller balance than the amount being confirmed
17. To achieve good internal control, which department should
perform the activities of matching shipping documents with sales
orders and preparing daily sales summaries?
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PHILIPPINE CHRISTIAN UNIVERSITY
College of Business Administration and Accountancy
a. Billing
b. Shipping
c. Credit
d. Sales order
18. Which of the following internal controls most likely would
assure that all billed sales are correctly posted to the accounts
receivable ledger?
a. Daily sales summaries are compared to daily postings to the
accounts receivable ledger
b. Each sales invoice is supported by a pre-numbered shipping
document
c. The accounts receivable ledger is reconciled daily to the
control account in the general ledger
d. Each shipment on credit is supported by a pre-numbered sales
invoice
19. What actions should the auditor take if a reply to a positive
confirmation request letter for a material amount is not received
from the customer within two or three weeks of being sent out?
a. Qualify the audit opinion due to lack of sufficient and
appropriate evidence
b. Send out a second request to the customer
c. Inform the entity’s internal audit department
d. Qualify the audit opinion due to material misstatement in the
financial statement
20. In the confirmation of accounts receivable, the auditor would
most likely
a. Request confirmation of a sample of the inactive accounts
b. Seek to obtain positive confirmation for at least 50% of the
total peso amount of the receivables
c. Require confirmation of all receivables from agencies of the
government
d. Require that confirmation request be sent within 1 month of
the fiscal year-end
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PHILIPPINE CHRISTIAN UNIVERSITY
College of Business Administration and Accountancy
AUDITING PROBLEMS
AUDIT OF RECEIVABLES
PROBLEM 1
The following information pertains to Bituin Inc.
1. Sales made during 20x7:
Cash P 100,000
Credit 320,000
Total P 420,000
2. Account receivable classified by age on December 31, 20x7:
Account receivable
Age of Accounts
balance
Under 30 days P 40,000
30 - 60 days 20,000
61 -120 days 10,000
Over 120 days 5,000
Total P 75,000
3. The allowance for Doubtful Accounts had a P400 credit balance
before adjustment in December 31, 20x7
Instructions:
Prepare the adjusting entry on December 31, 20x7, to record
estimated bad debts under each of the following:
a. The balance sheet approach, assuming that the uncollectible
rate is 5% of gross account receivable.
b. The balance sheet approach, assuming that the following
uncollectible percentages are appropriate: under 30 days, 1%;
30 – 60 days, 3%; 61- 120 days, 10%; over 120, 30%.
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PHILIPPINE CHRISTIAN UNIVERSITY
College of Business Administration and Accountancy
PROBLEM 2
The following T - account summarizes the transactions affecting the
accounts receivable of Charry Company for 20x7
Accounts Receivable
Jan. 1 balance after deducting Collection from customers,
credit balance of P 3,000 P 53,000 including overpayment of P5,000 P 620,000
Charge sales 625,000 Write offs 3,500
Charge for goods out on Merchandise returns 2,500
consignment 5,000 Allowance to customers for
Shareholders subscriptions 30,000 shipping damages 1,500
Accounts written off but recovered 1,000 Collections on carrier claims 1,000
Cash paid on customer for Collection on subscription 15,000
Jan. 1 credit balance 2,500
Deposit on contract 15,000
Claim against common carrier
for shipping damages 1,500
IOU's from employees 500
Cash advance to affiliate 10,000
Advance to supplier 5,000
Requirement:
Prepare adjusting journal entries and determine the correct accounts
receivable balance.
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PHILIPPINE CHRISTIAN UNIVERSITY
College of Business Administration and Accountancy
PROBLEM 3
Harding Corporation operated in an industry that has a high rate of bad
debts. On December 31, 20x7, before any year-end adjustments, Hiding’s
account receivable balance was P25,000. The year-end balance was reported
in the statement of financial position for the Allowance for Doubtful
Accounts will be based on the aging schedule shown as follows:
Time Amount of Accounts Probability of
Outstanding Receivable Collection
Under 15 days P 300,000 0.98
16 - 30 days 200,000 0.90
31 - 45 days 50,000 0.80
46 - 60 days 30,000 0.70
61 - 75 days 10,000 0.65
Over 75 days 10,000 0.00
Instructions:
a. What is the appropriate balance for the Allowance for Doubtful
accounts on December 31,20x7?
b. Show how accounts Receivable would be presented in the balance sheet
on December 31,20x7.
c. What is the peso effect on the year-end bad-debt adjustment on the
pretax income for 20x7?
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