Applied Auditing Report (Audit of Receivables)

ILLUSTRATIVE AUDIT CASE 10.
2: Sales Cut Off Examination
You have been asked to audit the records of XYZ Manufacturing Company, a small
manufacturer of precision tools and machines, for the year - ended December 31,
2015. Your examination of sales transactions revealed among others the following:
1. Some machines have been shipped on consignment to XYZs regular dealers.

These transactions have been recorded as ordinay sales and billed as such. As of
December 31, 2015 the machines billed and in the hands of consignees amounted
to P130,000. Sales price was determimed by adding 30% to cost.
2. On December 30, 2015, two machines were shipped to a customer on FOB
Shipping point basis. The sale was entered in the records on January 5, 2016 when
cash was received in the amount of P13,000.
3. The inventory as of December 31, 2015 included goods sold during November ,
2015 for P6,500 but returned on December 15, 2015. No entry has been made to
adjust the customers account for the goods returned. The goods were included at
selling price which was 103 % of cost.
As auditor of XYZ Manufacturing Company, what adjusting journal entries would you
recommend relative to the above findings?
SOLUTION: Illustrative Audit Case 10.2

The following are the recommended adjusting entries to correct the accounts of XYZ
Manufacturing Company as of December 31, 2015.
For audit finding No. 1
AJE (1) Sales
130,000
Accounts receivable
130,000
To reverse the entry made to record
deliveries to consignees which are still unsold as of 12/31/15.
(2) Inventories, 12/31/15
100,000
Cost of sales-inventories , 12/31/15

100,000
To include goods in the hands of consignees.
For Audit Finding No. 2
AJE (3) Accounts receivable
13,000
Sales
13,000
To record the sale of machines

shipped on 12/31/15, FOB shipping point.
For Audit Finding No. 3

AJE (4) Sales returns and allowances
6500
Accounts receivable
6500
To record goods returned by customer.

(5) Cost of Sales -inventories, 12/31/15
1500
Inventories, 12/31/15
1500
To correct overstatement of inventories.
ILLUSTRATIVE AUDIT CASE 10.3: APPLICATION OF ANALYTICAL

PROCEDURES IN AUDITING DOUBTFUL ACCOUNTS
Excerpts from Titanic 2015 Annual Report follow. Titanic is thr parent company of
five pharmaceutical companies in the Southeast Asia Region.
________(P Million)_______
Income Statement
2015
Revenues
P15,998
Net Income.
2,296
Statement of Financial Position
Current Assets:
Receivables , less allowance for uncollectible
2014
P17,154
3, 606
of P338 and P308, respectively..

P 3,078
P 3,052
Footnotes
Provision for uncollectibles . P385
P355
Required:
Answer the following questions assuming that (a) Titanic uses the allowance
account to record bad debts (provision for uncollectible) and (b) all revenues are
credit sales.
1. Are estimated uncollectible accounts increasing or decreasing as a percentage of
revenues?
2. What amount of write-offs of accounts receivable were recorded during 2015?
3. What was cash collected on receivables during 2015?
4. If the provision for uncollectible appeared in the statement of cash flows, where
would it be shown? Explain.
SOLUTION: ILLUSTRATIVE AUDIT CASE 10.3
Requirement (1) (Amount in P millions)
The estimated uncollectible accounts are decreasing as a percentage of revenue
s shown below:
Estimated bad debts:
____________2014___________2015_______
P355 / P 15988=
2.2%
P385 / P 17,154 =
2.0%
Requirement (2)(Amount in P millions)

Net write-offs in 2015 are P355 as derived below:
Allowance for doubtful accounts
Beginning balance
Add Bad debt expense
P 693
P 308
385
Less Ending balance
338
Net write-offs
P355
Requirement (3) (Amount in P millions)

Cash collected on receivables in 2015 is P16, 795 as derived below:
Accounts receivable:
Beginning balance
Accounts Receivable
P 3,078
308
P3,386
Add Revenues
17154
Total
P20540
Less: Ending balance

Accounts receivable
P 3052

Add Net write offs
Cash collections
338
P 3390
355
3745
P 16,795
Illutrative Audit Case 10.4: Audit of allowance for doubtful accounts

You have been appointed as external auditor of Orange Corppration. Orange
Corporation operates in an industry that has a high rate of bad debts. On December
31, 2015, before any year- end adjustments, Orange's Accounts receivable balance
was P600,000 and its allowance for doubtful accounts balance was P25,000. The
year-end balance reported in the statement of financial position for the Allowance
for doubtful accounts will be based on the aging schedule shown as follows:
Time Outstanding
Amount of Accounts
Probability of Collection
Receivable
Under 15 days
P 300, 000
-98
16-30 days
200,000
.90
31-45 days
50,000
.80
46-60 days
30,000
.70
61-75 days
10,000
.65
Over 75 days
10,000
.00
Required:
As an auditor, you have determine
a.) The appropriate balance for the allowance for doubtful accounts on December
31, 2015.
b.) How accounts receivable would be presented on the statement of financial
position on December 31, 2015.
c.) The peso effect of the year-end bad debt adjustment on the pretax income for
2015.
SOLUTION: ILLUSTRATIVE AUDIT CASE 10.4
a.) The allowance for doubtful accounts should have a balance of P48,500 on
December 31, 2015.The supporting calculations are shown below:
Days account
outstanding
0-15
Amount
P300,000
Expected Percentage
Uncollectible
.02
Estimated
Uncollectible
P 6,000
16-30
200,000
.10
20,000
31-45
50,000
.20
10,000
46-60
30,000
.30
9,000
61-75
10,000
.35
3,500
Balance for allowance for doubtful accounts
P48500
The accounts which have been outstanding over 75 days (P10,000) and have zero
probability of collection would be written off immediately and not be considered
when determining the proper amount for the allowance for doubtful accounts.
b.) Accounts receivable
less: Allowance for doubtful accounts
Net accounts receivable
P590,000
48,500
P541,500
c.) The year end bad debt adjustment would decrease pretax P33,500 for 2015 as
shown below:
Estimated amount required in the allowance for doubtful accounts
500
P48,
Balance in the account after write off of bad

Accounts but before adjustment (P25,000-10,000)
Required charge to expense
15,000
P 33,500
ILLUSTRATIVE AUDIT CASE 10.5: AUDIT OF NOTES RECEIVABLE AND

RELATED ACCOUNTS
During the course of the audit of the financial statements of Crome, Inc., for the
year ended December 31, 2015, you examined the notes receivable represented by
the following items:
1.) A four month note dated November 30, 2015,from the Aeon Company, P10,000;
interest rate , 16%;discounted on November 30, 2015,at 16 percent.
2.) A draft drawn payable 30days after date for P45,000 by the benton company on
the Dodge Company in favor of the Gerrard Company, endorsed to crome, Inc., on
December 2, 2015, and accepted on December 4, 2015.
3.)A 90-day note dated November 1, 2015, from J.C. Cruz of P25,000; interest at 16
percent; the note is for subscriptions to 250 preference shares of crome, Inc., at
P100 per share.
4.)A 60-day note dated May 3, 2015, from the National Investment Company,
P30,000;interest rate, 16 percent;dishonored at maturity;judgment obtained on
October 10,2015.Collection doubtful. (No interest after maturity.)
5.) A 90-day note dated January 4, 2015, from Romeo Paz, president of Crome,P
8,000; no interest; not renewed; president confirmed.
6.). A 120-day note dated September 14, 2015, from the Samson Company,
P6,000; interest rate,16percent ; note is held by bank as collateral.
When the company discounted a note ,Interest Expense was debited for the
discount cost and interest income was credited for the revenue.

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ILLUSTRATIVE AUDIT CASE 10.

2: Sales Cut Off Examination

1. Some machines have been shipped on consignment to XYZs regular dealers.

SOLUTION: Illustrative Audit Case 10.2

Cost of sales-inventories , 12/31/15

To record the sale of machines

For Audit Finding No. 3

To record goods returned by customer.

To correct overstatement of inventories.

ILLUSTRATIVE AUDIT CASE 10.3: APPLICATION OF ANALYTICAL

of P338 and P308, respectively..

Requirement (2)(Amount in P millions)

Less Ending balance

Requirement (3) (Amount in P millions)

Allowance for doubtful accounts

Less: Ending balance

Allowance for doubtful accounts

Illutrative Audit Case 10.4: Audit of allowance for doubtful accounts

Balance for allowance for doubtful accounts

Balance in the account after write off of bad

ILLUSTRATIVE AUDIT CASE 10.5: AUDIT OF NOTES RECEIVABLE AND

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