Audit of Receivables: Multiple Choice Questions and Exercises | Exams Auditing

A.P. M-1403A.P. M-1403

Audit of ReceivablesAudit of Receivables

Multiple Choice Questions -TheorMultiple Choice Questions -Theor

1. The purpose of test of controls over billing is to 1. The purpose of test of controls over billing is to

determine whetherdetermine whether

A. billed A. billed

goods have goods have

been shippedbeen shipped

B. shipments B. shipments

are billare bill

eded

C. billing C. billing

department personnel department personnel

are competentare competent

D. credit is D. credit is

approved before goods are approved before goods are

shippedshipped

2. Proper authorization of writeoffs of uncollectibles should be approved in 2. Proper authorization of writeoffs of uncollectibles should be approved in

which of thewhich of the

following department!following department!

A.Accounts "eceivableA.Accounts "eceivable

 B.Credit B.Credit

C.Accounts C.Accounts

Pa#ablePa#able

 D.Treasurer D.Treasurer

$. The purpose of tests of controls over shipping is to determine whether$. The purpose of tests of controls over shipping is to determine whether

A.Billed A.Billed

goods have been goods have been

shippedshipped

B.%hipments B.%hipments

are are

billedbilled

C.%hipping department C.%hipping department

personnel are personnel are

competentcompetent

D.Credit is D.Credit is

approved before goods approved before goods

are shippedare shipped

&. 'hich of the following might be detected &. 'hich of the following might be detected

b# an auditor(s review of the client(s sales cutoff!b# an auditor(s review of the client(s sales cutoff!

A.)*cessive A.)*cessive

goods returned goods returned

for creditfor credit

B.+nrecorded B.+nrecorded

sales sales

discountdiscount

C.,apping of C.,apping of

#earends #earends

accounts receivableaccounts receivable

D.-nflated sales D.-nflated sales

for the for the

#ear#ear

. An auditor most li/el# would review an entit#(s periodic accounting for numerical se0uenc. An auditor most li/el# would review an entit#(s periodic accounting for numerical se0uenc

e ofe of

shipping documents and invoices to supposhipping documents and invoices to suppo

rt management(s financial statement assertion ofrt management(s financial statement assertion of

A.)*istence or occurrenceA.)*istence or occurrence

B.aluationB.aluation

C."ight and obligationC."ight and obligation

D.CompletenessD.Completeness

. An inappropriate audi# ob3ective relative to accounts receivable is to . An inappropriate audi# ob3ective relative to accounts receivable is to

determine thatdetermine that

A.The accounts e*iA.The accounts e*i

st and are st and are

properl# valuedproperl# valued

B.The client has B.The client has

rights in rights in

the receivablethe receivable

C.The accounts represC.The accounts repres

ent the ent the

complete transaction complete transaction

processprocess

D.The accounts are collD.The accounts are coll

ected b# the balance sected b# the balance s

heet dateheet date

4. 4.

All of the following are e*amples of sAll of the following are e*amples of s

ubstantive tests to verif# valuation of net accountsubstantive tests to verif# valuation of net accounts

receivable e*cept thereceivable e*cept the

A."ecomputation if A."ecomputation if

allowance for bad allowance for bad

debtsdebts

B.-nspection of accounts for currB.-nspection of accounts for curr

ent versus noncurrent statent versus noncurrent stat

us in the statement of us in the statement of

financialfinancial

positionposition

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A.P. M-1403A.P. M-

Audit of ReceivablesAudit of Receivables Multiple Choice Questions -TheorMultiple Choice Questions -Theor

The purpose of test of controls over billing is to1. The purpose of test of controls over billing is to determine whetherdetermine whether A. billedA. billed goods havegoods have been shippedbeen shipped B. shipmentsB. shipments are billare billeded C. billingC. billing department personneldepartment personnel are competentare competent D. credit isD. credit is approved before goods areapproved before goods are shippedshipped
Proper authorization of writeoffs of uncollectibles should be approved in2. Proper authorization of writeoffs of uncollectibles should be approved in which of thewhich of the following department!following department! A.Accounts "eceivableA.Accounts "eceivable B.CreditB.Credit C.AccountsC.Accounts Pa#ablePa#able D.TreasurerD.Treasurer $. The purpose of tests of controls over shipping is to determine whether$. The purpose of tests of controls over shipping is to determine whether A.BilledA.Billed goods have beengoods have been shippedshipped B.%hipmentsB.%hipments areare billedbilled C.%hipping departmentC.%hipping department personnel arepersonnel are competentcompetent D.Credit isD.Credit is approved before goodsapproved before goods are shippedare shipped &. 'hich of the following might be detected&. 'hich of the following might be detected b# an auditor(s review of the client(s sales cutoff!b# an auditor(s review of the client(s sales cutoff! A.)cessiveA.)cessive goods returnedgoods returned for creditfor credit B.+nrecordedB.+nrecorded salessales discountdiscount C.,apping ofC.,apping of #earends#earends accounts receivableaccounts receivable D.-nflated salesD.-nflated sales for thefor the #ear#ear . An auditor most li/el# would review an entit#(s periodic accounting for numerical se0uenc. An auditor most li/el# would review an entit#(s periodic accounting for numerical se0uenc e ofe of shipping documents and invoices to supposhipping documents and invoices to support management(s financial statement assertion ofrt management(s financial statement assertion of A.)istence or occurrenceA.)istence or occurrence B.aluationB.aluation C."ight and obligationC."ight and obligation D.CompletenessD.Completeness . An inappropriate audi# ob3ective relative to accounts receivable is to. An inappropriate audi# ob3ective relative to accounts receivable is to determine thatdetermine that A.The accounts eiA.The accounts eist and arest and are properl# valuedproperl# valued B.The client hasB.The client has rights inrights in the receivablethe receivable C.The accounts represC.The accounts represent theent the complete transactioncomplete transaction processprocess D.The accounts are collD.The accounts are collected b# the balance sected b# the balance sheet dateheet date 4.4. All of the following are eamples of sAll of the following are eamples of substantive tests to verif# valuation of net accountsubstantive tests to verif# valuation of net accounts receivable ecept thereceivable ecept the A."ecomputation ifA."ecomputation if allowance for badallowance for bad debtsdebts B.-nspection of accounts for currB.-nspection of accounts for current versus noncurrent statent versus noncurrent status in the statement ofus in the statement of financialfinancial positionposition

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 eisting 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 eistence C.aluation and rights and obligations D.)*istence and completeness

An auditor who has confirmed accounts receivable ma# discover that the sales 3ournal was held open past #earend 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
The positive re0uest form of accounts receivable confirmation ma# be used when the Combined Assessed ,evel of -nherent and Control "is/ is -ndividual Account "eceivable Balance are A. ,^ o^ w^ ,^ a^ r^ g^ e B. , o w % m a l l C. ; i g h % m a l l D. ; i g h , a r g e

D."ights and obligations

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
-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 epect an eperienced 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 1564: Advance pa#ments to creditors on purchase orders 46::: Advances to affiliated companies 1546:: Customers( accounts reporting credit balances arising from sales ?1126::@ return -nterest receivable on bonds 46::: ther trade accounts receivable  unassigned %ubscription receivable due in $: da#s &126:: Trade accounts receivable  assigned ?Ba#ot Co.(s e0uit# in 1546:: assigned accounts is P46:::@ Trade installment receivable due 115 months6 including 16::: unearned finance charges of P16::: Trade acounts receivables from officers due currentl# 1162: Trade accounts receivable on which postdated chec/ are held ?no entries $46::

were made on receiipts of chec/s@ "e0uired> a. Trade accounts receivable balance as of December $162:1&. P4162: 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 $:62:1& has been eliminated from inventor#. The inventor# as determined b# ph#sical inventor# count has been recorded on the boo/s b# the compan#(s controller. 8o perpetual records are maintained. All sales are made on <B shipping point basis. =ou are to assume that all purchase invoice have been correctl# recorded. The following list of sales invoices are entered in the sales boo/s for months of December 2:1& and anuar# 2:1 respectivel#. D)C)9B)" 2:1& %ales invoice amount %ales invoice date C% Date shipped a@ P$:6 ::: December 21 P2:6::: December $16 2:1& b@ 226 ::: December $1 156::: December $:6 2:1& c@ 1:6 ::: December 27 6 ::: December $:6 2:1& d@ &:6 ::: December $1 2&6 ::: anuar# :$6 2:1 e@ 1:: 6 ::: December $: 6 ::: December 276 2:1& ?shipped to consignee@ f@ 12 :6 ::: December $: 5:6 ::: anuar# 26 2:1 A8+A"= 2:1 g@ :6 ::: December $1 &:6 ::: December $:62:1& h@ &:6 ::: anuar# :2 2$6 ::: anuar# 26 2:1 i@ 5:6 ::: anuar# $ 6 ::: December $16 2:1& 3@ 7:6 ::: anuar# & &6 ::: December 276 2:1& erification from consignee indicates that :E of the merchandise is still unsold at December $16 2:1&. Required: Prepare the necessary adjusting entries at December 31, 2014 in connection with the oregoing data:

a. Cost of sales 2 : 6 :::

Cocacola Compan# Accounts receivable schedule December $16 2:1& Customer Balance Current Past due ollibee P 15 & 6 ::: P  P 15 & 6 ::: Purgold 5 &: 6 ::: & 7  6 ::: $&& 6 ::: % 9 4 :: 6 ::: 15 & 6 :::  1  6 ::: 9 ercur# 4 & 56 ::: & 2 & 6 ::: $ 2 & 6 ::: <eed)* $ 2 : 6 :::  $ 2 : 6 ::: 9 ini stop 2 & 56 ::: 12 : 6 ::: 1256 ::: Davao inconvenience store?D-%@ 56 ::: 56 :::  9 cdonalds  126 ::: 1 : 6 ::: $ 26 ::: 9 andarin & 5 : 6 ::: & 5 : 6 :::  The accounts receivable control account balance was determined to be P&6 :&:6 :::. The eternal auditor submitted the following audit comments for possible ad3ustments> ollibee 9 erchandise found defective returned b# customers on ctober for credit6 but the credit memo was issued b# Cocacola onl# on anuar# 76 2:1. Puregold Account is good but usuall# pa#s late. % 9 9 erchandise worth P$ 2 :6 ::: was destro#ed while in transit on 9a# $16 2:1&6 terms <B Destination. The carrier was billed on une 16 2:1&. ?%ee <ed) and 9andarin@ 9ercur# Customer billed twice in error for P5:6 :::. Balance is collectible. <ed)* Collected in full on anuar# $ 16 2 : 1 . 9ini %top Paid in full on December $:6 2:1& but not recorded. Collections were deposited on anuar# 26 2:1. D-% "eceived account confirmation from customer for P 55 : 6 :::. -nvestigation revealed an erroneous credit for P5: 6 :::. ?see 9cdonalds@. 9 cdonalds 8 eglected to post P 5 : 6 ::: credit to customerFs account. 9 andarin Customer wants to /now reason for receipt of P$ 2 :6 ::: credit memo as their accounts pa#able balance was P5::6 :::. ")G+-")D>

a. Adjusting entries as of "ecember #1, 2 014.

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 24 8, 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,

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 $ 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 made 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& Dec. $16 2:

Aging of accounts receivable (((

-ess than1 ear old  1'6, 120

1 to 2 ears old 12, 000

2 to # ears old

+otal accounts receivable  188, 120

)nventories 116, 000

8o. CustomerFs Comments Audit findings 14 Chec/ for P 16 2 :: was mailed on December $:6 2:1& Chec/ received 1H&H1 and credited on that date &: oods should have been billed at 5:E of P6 ::: retail price since we received them on consignment. Pricing polic# confirmed b# sales manager. The cost of consigned goods amounts to P$6 ::. $ 'e returned the goods on 12H:$H1& )*amined receiving report for returned goods. Credit memo for P6 ::: dated 12H:4H2:1& in advertentl# not recorded. 45 'e do not owe the amount of P26 ::: "eceived sales documentation confirmed a posting error. 112 Per our telephone conversation 6 #ou agreed to reduce the price b# :E since some of the goods were damaged. Credit manager agreedI credit memo for P2 6 :: will be issued in anuar# 2:1. 11 $ The balance of P 26 :: was paid on December 2$6 2:1& per #our official receipt 8o. 754. Amount was erroneousl# credited to subsidiar# ledger account of 8ell# instead of )rnel. 122 "eturned merchandise amounting to P1 26 ::: on December 26 2:1&. 9erchandise was included in the inventor#6 P46 2::. Credit memo was issued on anuar# $6 2:1. 1 $ 5 "educe #our bill b# P 26 :::. - am entitled to a special discount of 2:E. %pecial discount of 2 :E confirmed b# sales manager. ). nell# is an emplo#ee of )rnell# Corporation. %ale was made in the ordinar# course of business and granting of credit passed through the routine process. 1  The goods worth P 6 ::: were received in anuar# 2:1. oods shipped <B shipping point on December 256 2:1&. P" is $:E. Required: Prepare ad3usting entries 8o. &: 9erchandise -nv. $6 :: Cost of sales $6 :: $ %ales return 6 :::

Accounts receivable 6 ::: 45 %ales 26 ::: Accounts receivable 26 ::: 112 %" 26 :: A" 26 :: 11$ A"8ell# 26 :: A")rnel 26 :: 122 %" 126 ::: A" 126 ::: 1$5 %D 26 ::: A" 26 ::: P"B,)9  The ,ou Co. sells direct to retail customers and also to wholesalers. Accounts receivable and an allowance for bad debts are maintained separatel# for each division. n anuar# 16 2:1& the balance of retail accounts receivable was P 2:76 ::: while the bad debts with respect to retail customers was a credit of P 46 ::. The following summar# pertains onl# to retail sales since 2:11> Credit sales Bad debts written off Bad debts recoveries 2 : 11 P 16 11 : 6 ::: P 2  6 ::: P 26 1 : 2 : 12 16 22  6 ::: 276 :: $ 6 4 : 2 : 1 $ 16 & 6 ::: $: 6 ::: $ 6 :: 2 : 1 & 16 :: 6 ::: $ 16 ::: & 6 2 :: Bad debts are provided for as percentage of credit sales. The accountant calculates the percentage annuall# b# using the eperience of the three #ears prior to the current #ear. The formula is bad debts written off less recoveries epressed as percentage of the credit sales for the sa me period. A cash receipt in 2:1& from credit sales to retail customers was P16 $5:6 2::. Based on the above and the result of #ou audit6 answer the following>

1. +he ercentage to be used to comute the alloance for bad debts on

"ecember #1, 2014. 2:

2. =or 2014, the rovision for bad debts ith resect to credit sales. #0,

Required:

1. >o much is the adjusted balance of the alloance for doubtful

accounts as of "ecember #1, 201#9 '', 10 0

2. +he necessar adjusting entr to adjust the alloance for doubtful

accounts as of "ecember #1, 201#

"oubtful accounts e?ense 22,

Alloance for doubtful accounts 22,

#. An aging analsis of accounts receivable ould rovide an indication

as to the

a. @alidit of the accounts

b. )ntegrit of the credit grantors

c. &ollectabilit of the accounts

d. Solvenc of the customers

4. hich account balance is most liel to be misstated if an aging of

accounts receivable is not erformed

a. Alloance for bad debts

b. Accounts receivable

c. Sales returns and alloances

d. Sales revenue

%. An auditor selects a samle from the le of shiing documents to

determine hether invoices ere reared. +his test is erformed to

satisf the audit objective of

a. Accurac

b. &ontrol

c. &omleteness

d. ?istence

P"B,)9 5

-n connection with #our e*amination of the financial statements of "uth Tambo/6 -nc. for the #ear ended December $16 2:1$6 #ou were able to obtain certain information during #our audit of the accounts receivable and related accounts.

• +he "ecember #1, 201# balance in the Accounts receivable control

accounts is 8#', !00.

• An aging schedule of the accounts receivable as of "ecember #1, 201#

is resented bleo

Age Net debit balance ercentage to be alied

after corrections have

been made

60 das and under # 8 ', 800 1 $&N+

61 to! 0 das # 0 ', 100 2 $&N+

! 1 to 120 das 8 !, 800 % $&N+

ver 120 das %#, 200 "enitel uncollectible,

!,000; the remainder is

estimated to be 2%:

uncollectible

+otal 8#',!

• +o entries made in the "oubtful Accounts ?ense account ere

1. A debit on "ecember #1 for the amount of the credit to the

alloance for doubtful accounts.

2. A credit for 6, 100 on November #0, 201#, and a debit to

Alloance for "oubtful Accounts because of a banrutc. +he

related sales too lace on ctober 1, 201#.

• +he alloance for "oubtful Accounts schedule is resented belo 3

"ebit &redit Balance

Canuar 1, 201# 1!, '

November #0,

"ecember #1,

D8#', !00 E %:F

• +here is a credit balance in one account receivable D61 to !0 dasF of

11,000; it reresents an advance on sales contract.

"e0uired> 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#

2. >o much is the adjusted balance of the alloance for doubtful

accounts as of "ecember #1, 201#9 2%,4'%

compan# has ac/nowledged its responsibilit# for the lost merchandise. o 3 o - am entitled to a 1 :E emplo#ee discount. =our bill should be reduced b# P$6 :: Anne is an emplo#ee of Charm.starting 8ovember 2:1$6 all compan# emplo#ees were entitled to a special discount. )fem 'e have not #et sold the goods. 'e will remit the proceeds as soon as the goods are sold. 9erchandise billed for P& 6 ::: were consigned to )fem on December $:6 2:1$. The goods cost P$76 :::. Dodong 'e do not owe #ou P: 6 :::. 'e alread# paid our accounts as evidenced b# " J 12$& The sale of merchandise on December 156 2:1$ was paid b# Dodong on anuar#  2:1&. <rancis "educe #our bill b# P& 6 :: This amount represents freight paid b# the customer for the merchandise shipped on December 146 2:1$ 6 terms <B destinationcollect. Based on #our discussion with CharmFs credit manager6 #ou both agreed that an allowance for doubtful accounts should be maintained using the following rates> : da#s old and below 1E 1 to 7: da#s 2E ver 7: da#s E Required: Based on the above end the result of #our audit6 answer the following>

1. +he adjusted balance of accounts receivable in the 60 das and belo

categor as of "ecember #1, 201#. 61', 400

2. +he adjusted balance of accounts receivable as of "ecember #1, 201#.

#. +he adjusted alloance for doubtful accounts as of "ecember #1,

4. +he entr to adjust the alloance for doubtful accounts.

Alloance for doubtful accounts 4, 1#

"oubtful accounts e?ense 4, 1#

%. +o gather audit evidence about the roer credit aroval of sales, the

auditor ould selects a samle of documents from the oulation

reresented 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>

Audit of Receivables: Multiple Choice Questions and Exercises, Exams of Auditing

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