I.

MULTIPLE CHOICES

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. Bonds payable c. Bank charges d. Sales

2. 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 c. Valuation
b. Rights and obligations d. Completeness

3. Which of the following might be detected by an auditor’s review of the 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

4. Cut-off tests designed to detect credit sales made before the end of the year that have been recorded
in the subsequent year provide assurance about management’s assertion of
a. Presentation b. Completeness c. Rights d. Existence

5. 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.
6. 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.

7. 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 an 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.

8. Which of the following statements would an auditor most likely to add to the negative form of
confirmations of accounts receivable to encourage timely consideration by the recipient?
a. “This is not a request for payment; remittances should not be sent to our auditors; in the enclosed
envelope”
b. “Report any difference 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 difference within 15 days, it will be assumed that this statement is correct.”
d. “The following invoices have been selected for confirmation and represent amounts that are
overdue.”

9. Auditing standards define a confirmation as “the process of obtaining and evaluating a direct
communication from a third party in response to a request for information about a particular item
affecting financial statement assertions” Two assertions for which
confirmation of accounts receivable balances provides primary evidence are
a. Completeness and valuation c. Rights and obligations and existence
b. Valuation and rights and obligations d. Existence and completeness

10. Auditor may use positive or negative forms of confirmations requests for accounts receivable. An
auditor most likely will use
a. The positive form to confirm all balances regardless of the size.
b. A combination of the two forms, with the positive form used for large balances and the negative for
the small balances
c. A combination of the two forms, with the positive form used for trade receivables and the negative
form for other receivables.
 d. The positive form when the combined assessed level of inherent and control risk for assertions
related to receivables is acceptably low, and the negative form when it is unacceptably high.

II. PROBLEMS

PROBLEM NO. 1

Your audit disclosed that on December 31, 2006, the accounts receivable control account of Alilem
Company had a balance of P2,865,000. An analysis of the accounts receivable account showed the
following:
Accounts known to be worthless P 37,500
Advance payments to creditors on purchase orders 150,000
Advances to affiliated companies 375,000
Customers’ accounts reporting credit balances arising from sales return
(225,000)
Interest receivable on bonds 150,000
Other trade accounts receivable – unassigned 750,000
Subscriptions receivable for common stock due in 30 days 825,000
Trade accounts receivable - assigned (Finance company’s equity in assigned
accounts is P150,000) 375,000
Trade installment receivable due 1 – 18 months, including unearned finance
charges of P30,000 330,000
Trade receivables from officers due currently 22,500
Trade accounts on which post-dated checks are held (no entries were made on
receipts of checks) 75,000
P2,865,000

Based on the above and the result of your audit, determine the adjusted balance of following:

1. The trade accounts receivable as of December 31, 2006 is

2. The current trade and other receivables net as of December 31, 2006 is

3. How much of the foregoing will be presented under noncurrent assets as of December 31, 2006?

PROBLEM NO. 2
Your audit of Banayoyo Corporation for the year ended December 31, 2006 revealed that the
Accounts Receivable account consists of the following:
Trade accounts receivable (current) P3,440,000
Past due trade accounts 640,000
Uncollectible accounts 128,000
Credit balances in customers’ accounts (80,000)
Notes receivable dishonored 240,000
Consignment shipments – at cost
The consignee sold goods costing P96,000 for P160,000. A 10%
commission was charged by the consignee and remitted the balance to
Banayoyo. The cash was received in January, 2007. 320,000
Total P4,688,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000. It is
estimated that an allowance should be maintained to equal 5% of trade receivables, net of amount due
from the consignee who is bonded. The company has not provided yet for the 2006 bad debt expense.

Questions:
Based on the above and the result of your audit, determine the adjusted balance of following:
1. Trade accounts receivable
2. Allowance for doubtful accounts
3. Doubtful accounts expense

PROBLEM NO. 3
Presented below are a series of unrelated situations. Answer the following questions relating to each of
the independent situations as requested.
1. Bantay Company’s unadjusted trial balance at December 31, 2006, included the following accounts:
Debit Credit
Accounts receivable P1,000,000
Allowance for doubtful accounts 40,000
Sales P15,000,000
Sales returns and allowances 700,000
Bantay Company estimates its bad debt expense to be 1 1/2% of net sales. Determine its bad
debt expense for 2006.
a. P225,000 c. P214,500
b. P254,500 d. P 55,000

2. An analysis and aging of Burgos Corp. accounts receivable at December 31, 2006, disclosed the
following:
Amounts estimated to be uncollectible P 1,800,000
Accounts receivable 17,500,000
Allowance for doubtful accounts (per books) 1,250,000
What is the net realizable value of Burgos’ receivables at December 31, 2006?
a. P15,700,000 c. P16,250,000
b. P17,500,000 d. P14,450,000

3. Cabugao Company provides for doubtful accounts based 3% of credit sales. The following data are
available for 2006.
Credit sales during 2006 P21,000,000
Allowance for doubtful accounts 1/1/06 170,000
Collection of accounts written off in prior years (Customer credit was
reestablished) 80,000
Customer accounts written off as uncollectible during 2006 300,000

What is the balance in allowance for doubtful accounts at December 31, 2006?
a. P630,000 c. P500,000
b. P420,000 d. P580,000

4. At the end of its first year of operations, December 31, 2006, Caoayan, Inc. reported the following
information:
Accounts receivable, net of allowance for doubtful accounts P9,500,000
Customer accounts written off as uncollectible during 2006 240,000
Bad debts expense for 2006 840,000

What should be the balance in accounts receivable at December 31, 2006, before subtracting the
allowance for doubtful accounts?
a. P10,100,000 c. P 9,740,000
b. P10,340,000 d. P10,580,000

5. The following accounts were taken from Cervantes Inc.’s balance sheet at December 31, 2006.
Debit Credit
Accounts receivable P4,100,000
Allowance for doubtful accounts 100,000
Net credit sales P7,500,000

If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported
for 2006.
a. P123,000 c. P223,000
b. P 23,000 d. P225,000

PROBLEM NO. 4
The adjusted trial balance of Galimuyod Company as of December 31, 2005 shows the following:
Debit Credit
Accounts receivable P1,000,000
Allowance for bad debts P40,000

Additional information:
Cash sales of the company represents 10% of gross sales.
90% of the credit sales customers do not take advantage of the 2/10, n/30 terms.
It is expected that cash discount of P6,000 will be taken on accounts receivable outstanding at
December 31, 2006.
Sales returns in 2006 amounted to P400,000. All returns were from charge sales.
During 2006, accounts totaling to P44,000 were written off as uncollectible; bad debt recoveries
during the year amounted to P3,000.
The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding
accounts receivable at year end. The required percentage at December 31, 2006 is 150% of the rate
used on December 31, 2005.

Questions:
Based on the above and the result of your audit, answer the following:
1. The accounts receivable as of December 31, 2006 is
 2. The allowance for doubtful accounts as of December 31, 2006 is
3. The net realizable value of accounts receivable as of December 31, 2006 is
4. The doubtful account expense for the year 2006 is

PROBLEM NO. 5
In your audit of Lidlidda Plastic Products Co., you noted that the company’s balance sheet shows the
accounts receivable balance at December 31, 2005 as follows:
Accounts receivable P3,600,000
Allowance for doubtful accounts 72,000
P3,528,000

During 2006, transactions relating to the accounts were as follows:

Sales on account, P38,400,000.
Cash received from collection of current receivable totaled P31,360,000, after discount of P640,000
were allowed for prompt payment.
Customers’ accounts of P160,000 were ascertained to be worthless and were written off.
Bad accounts previously written off prior to 2005 amounting to P40,000 were recovered.
The company decided to provide P184,000 for doubtful accounts by journal entry at the end of the
year.
Accounts receivable of P5,600,000 have been pledged to a local bank on a loan of P3,200,000.
Collections of P1,200,000 were made on these receivables (not included in the collections previously
given) and applied as partial payment to the loan.

Questions:
Based on the above and the result of your audit, answer the following:
1. The accounts receivable as of December 31, 2006 is
2. The allowance for doubtful accounts as of December 31, 2006 is
3. The net realizable value of accounts receivable as of December 31, 2006 is
4. If receivables are hypothecated against borrowings, the amount of receivables involved should be
a. Disclosed in the statements or notes
b. Excluded from the total receivables, with disclosure
c. Excluded from the total receivables, with no disclosure
d. Excluded from the total receivables and a gain or loss is recognized between the face value and
the amount of borrowings

PROBLEM NO. 6
In connection with your examination of the financial statements of Nagbukel, Inc. for the year ended
December 31, 2006, you were able to obtain certain information during your audit of the accounts receivable
and related accounts.

The December 31, 2006 balance in the Accounts Receivable control accounts is P788,000.

The only entries in the Doubtful Accounts Expense account were:

A credit for P1,296 on December 2, 2006 because Company A remitted in full for the accounts
charged off on October 31, 2006; and
A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts.

The Allowance for Doubtful Accounts schedule is follows:

Debit Credit Balance

January 1, 2006 P14,632
October 31, 2006
Uncollectible accounts:
Company A – P1,296
Company B – P3,280
Company C – P2,256 P6,032 8,600
December 31, 2006 P39,400 P48,000

An aging schedule of the accounts receivable as of December 31, 2006 is presented below:
Amount to which the Allowance is
Net debit to be adjusted after adjustments
Ag
e balance and corrections have been made
0 to 1 month P372,960 1 percent
1 to 3 months 307,280 2 percent
3 to 6 months 88,720 3 percent
Over 6 months 24,000 Definitely uncollectible, P4,000;
P8,000 is considered 50%
 uncollectible; the remainder is
estimated to be 80% collectible.

There is a credit balance in one account receivable (0 to 1 month) of P8,000; it represents an advance on
a sales contract. Also, there is a credit balance in one of the 1 to 3 months account receivable of P2,000
for which merchandise will be accepted by the customer.

The ledger accounts have not been closed as of December 31, 2006. The Accounts Receivable control
account is not in agreement with the subsidiary ledger. The difference cannot be located, and you decided
to adjust the control account to the sum of the subsidiaries after corrections are made.

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the adjusted balance of Accounts Receivable as of December 31, 2006?
2. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2006?
3. How much is the net adjustment to the Allowance for Doubtful Accounts?
4. How much is the Doubtful Accounts expense for the year 2006?
5. How much is the net adjustment to the Doubtful Accounts expense account?