2Audit on Receivables

Accounting for Receivables 

Definition
Receivables are financial assets that represent a contractual right to receive cash or another
financial asset from another entity

Classification of receivables
1. Trade receivables- arising from sales of goods and services
● accounts receivable
● Notes receivables
2. Non-trade receivables- Examples
● Advances to or receivables from shareholders, directors, officer or employees CA
● Advances to affiliates NCA
● Advances to supplier CA
● Subscription receivable -1 year collectible otherwise presented in Equity
● Creditor’s accounts with debit balances (Accounts payable with debit balances)
● Special deposits on contract bids NCA
● Accrued income CA interest receivable
● Claims receivables CA

Loan receivables - bank and other financial institutions, receivables result from loans to
customers

Classification - CA- NCA

Presentation- Trade and other Receivables

Initial measurement of AR
- Financial asset- initially at FV fair value
- Short term receivables- FV=Face value= Original invoice amount
- Accounts receivable shall be measured initially at Face value = Original invoice amount

Subsequent measurement
- Net realizable value= AR- ( allowance for freight charge, sales return, sales discount or
doubtful accounts)
AR xxx
Less: Allow for DA xxx
NRV of AR xxx

normal AR = debit = Credit Customers’ credit balances

Freight charge

1. FOB destination
2. FOB shipping point
3. Freight collect
4. Freight prepaid

Freight out = sale

Freight in = purchase

Reporting Period
Nov. 2 Dec 31 Jan 5
I------------------------------------I-----------------------------------I--------------------------------I
Shipped Destination /Receipt

FOB shipping point = buyer as of Dec 31

FOB destination = seller

1. A Company sold merchandise to X Company, term FOB destination on November 2

December 31, who own the goods- seller ( Nov 2- Jan 4)
Jan. 5, who own the goods- buyer

2. A Company sold merchandise to X Company, term FOB shipping on November 2

Nov. 2 , who own the goods- buyer

Credit sales == Dr. Accounts receivable

Cr. Sales
Dr. SRA
CR. AR
Collection = Dr. Cash
Cr. AR
 Accounting for Bad Debts

Allowance method Direct write off method

To recognize doubtful accounts Doubtful account xx none

Allowance for DA xx

To write off accounts that is Allowance for DA 100 Bad debts xx

worthless Accounts rec’ble 100 Acct. receivable xx

To collect accounts previously write Accounts rec’ble 60 AR xx

off( recovery of write off account) Allowance for DA 60 Bad debts/Other income
xx
Cash xx Other income
AR xx
Cash xx
AR xx

Accounts receivable (T-account)

Debit Credit
Beginning balance xx 2,000 Collection of accounts receivable xx 300
Credit sales/Charge sales ?? xx 400 Collection from recovery on write off xx 20
Recovery on accounts written off xx 20 Sales discount xx 10
Sales return and allowance xx 40
Write off accounts xx 50

Ending Accounts receivable xxx 2,000

 Methods of estimating doubtful accounts
1. Aging the accounts receivable or SFP approach P 200,000
2. Percent of accounts receivable or SFP approach 2% x P 6,000,000 = 120,000
3. Percent of sales or Income Statement approach 1% x P 10,000,000= 100,000

Allowance for doubtful accounts- aging of AR

Debit Credit
Beginning/Before balance 100,000
Write off of accounts receivable 10,000 Recoveries 8,000
Doubtful accounts expense ?? 102,000
Ending 200,000

Allowance for doubtful accounts- % of AR

Debit Credit
Beginning/Before balance 100,000
Write off of accounts receivable 10,000 Recoveries 8,000
Doubtful accounts expense ?? 22,000
Ending 120,000

Allowance for doubtful accounts- % of Sales

Debit Credit
Beginning/Before balance 100,000
Write off of accounts receivable 10,000 Recoveries 8,000
Doubtful accounts expense 100,000

Ending ??? 198,000

Notes Receivables

● Definition
● Initial measurement of notes receivable
❖ Initially at present value
❖ Short term notes receivable shall be measured at face value
❖ Interest bearing notes receivable
❏ Long term will depend; interest bearing notes - at face value
❖ Non interest bearing notes receivable- measured at present value
● Subsequent measurement
Long term notes receivable- amortized cost
● Meaning of amortized cost
❖ Minus principal repayment
❖ Plus or minus cumulative amortization of any difference bt. The initial carrying
amount and the principal maturity
❖ Minus reduction for impairment or uncollectibility
● For long-term noninterest bearing notes receivable, the amortized cost is the
present value plus amortization of the discount , or the face value minus
the unamortized unearned interest income
Audit on Receivables

https://cpahalltalk.com/auditing-receivables-revenues/

Primary Accounts Receivable and Revenue Assertions

The primary relevant accounts receivable and revenue assertions are:
● Existence and occurrence
● Completeness
● Accuracy
● Valuation
● Cutoff

Analytical procedures are one of many financial audit processes which help an auditor
understand the client's business and changes in the business, and to identify potential risk
areas to plan other audit procedures.It is also the evaluation of financial information made by
a study of plausible or credible relationships among both financial and non-financial data.

● Compare the days sales outstanding metric to the amount for prior years.
● Review the current ratio over several reporting periods. ...
● Compare the ending balances in the compensation expense account for
several years. ...
● Examine a trend line of bad debt expenses.
● Financial ratios
● Variances on cost accounting

Of these assertions,in general—existence (of receivables), occurrence (of

revenues) and valuation (of receivables) are most important. So, clients assert
that:
● Receivables exist
● Receivables are properly valued, and
● Revenues occurred

In performing accounts receivable and revenue walkthroughs, ask questions

such as:
● Are receivables subsidiary ledgers reconciled to the general ledger?
● Is a consistent allowance methodology used?

● What method is used to compute the allowance and is it reasonable?

● Who records and approves the allowance?

● Who reviews aged receivables?

● What controls ensure that revenues are recorded in the right period?
● Is there adequate segregation of duties between persons recording,
billing, and collecting payments? Who reconciles the related records?

● What software is used to track billings and collections?

● Are there any decentralized collection locations?

● When are revenues recognized and is the recognition in accordance with

the reporting framework?
● What receivables and revenue reports are provided to the owners or the

governing body?
Exercise 1
1.
Advances to officers and employees
Due from officers and employees
Debit credit
Accounts receivable 40,000
Advances to officers & employees 2,500
Creditors’ with debit balance 450
Advances to sales person 1,000
Subscription receivable- share cap 4,600
Accounts payable 19,250
Advances from customers on
Sales contract 450
Salaries payable 3,300
Allowance for DA 500
Customers’ credit balance 2,000
Receivables 23,050

2. Current assets
AR 40,000
Less: Allow for DA 500 39,500
Creditors’ debit balances 450
Advances to officers and Emp 2,500
Subscription recei 4,600
Advances to salesperson 1,000

Current liabilities
AP 19,250
Customers’ credit balances 2,000
Advances from customer 450
Salary payable 3,300
Exercise # 2
Cash 98% 2,009,842
Sales discount 2%
AR 100%
Cash xx
AR XX

A. Accounts receivable, Jan P 546,400

Add: sales on account 2,622,832
Total 3,169,232
Less: Collection during the year
Within the discount 2,009,842/98% 2,050,859
Without discount 2,857,960-2,009,842 848,118
Account written off 18,700
Sales return 27,000 2,944,677
Accounts receivable, Dec. 31 224,555

B. % of AR Dec 31 20X4 16,392/ P 546,400 = 3%

% for allowance for DA ⅔ x 3% = 2%
Required Allowance for DA 2% x P 224,555 = P 4,491

Allowance for DA , Jan1 P 16,392 CR

Less: Accounts written 18,700 Dr
Balance (2,308) Dr
Required allowance for DA 4,491
Estimated bad debts expense 6,799

Adjusting entry
Doubtful account expense 6,799
allowance for DA 6,799
 Problem1

Stardust Corporation
Accounts Receivable Aging Schedule
December 31, 2___
Aging distribution

Accounts past due

Name of customers Date of Balance Accounts Less than More than 2

invoice Dr (Cr) not due 2 months months

ABC Corp 11.25 846 846

DEF company 7.29 98 98

8.6 280 280

378

GHI Incorp 9.14 214 214

10.18 1,206 1,206

1,420

JKL Trading 9.20 29 29

10.29 1,105 1,105

11.30 904 904

2,038

MNO Supply - -

PQR Dealers 8.2 147 147

9.17 22 22

169

STU Corp(Subsidiary) 12.31 5,000

XYZ Company 12.15 (100)

Balance per ledger P 9,751

Add(deduct)

AJE (1) (5,000)

AJE (2 ) 100

Balance as adjusted 4,851 1,750 2,576 525

Accounts are considered past due 60days after date of sale

Date of sales Date for 60 days Days past dues up to

Dec 31
GHI 9.14 11.14 1 mon & 15 days=
JKL 9.20 11.20
10.29 12.29
11.30 1.30 next yr
PQR 8.20 10.20
9.17 11.17

JKL 600-413= 187; 216-187= 29

 Stardust Corporation
Allowance for doubtful accounts
December 31, 20----

Balance per ledger P (40)

Add: provision for doubtful 455.10

accounts (AJE 3)

Balance as adjusted P 415.10

Required allowance

Computation of required balance Amount % Amount

Accounts due P 1,750 -

Accounts less than 2 month 2,576 10% 257.60

Accounts more than 2 months 525 30% 157.50

Total P 4,851 P 415.10

Adjusting entries
1. Advances to subsidiary 5,000
Accounts receivable 5,000

2. Accounts receivable 100

Customer’s with credit
Balance 100

3. Doubtful accounts expense 455.10

Allowance for Doubtful
Accounts 455.10
___________allowance for DA____________________
Dr Cr
40 DA expense ? 455.10
_________________________________
Balance 415.10
 Republic Central Colleges

Audit in Receivables

PROBLEM NO. 1
In your audit of Lizie Plastic Products Co. you noted that the company’s statement
of Financial Position shows the accounts receivable balance at December 31, 2019 as
follows:
Accounts receivable P 3,600,000
Allowance for doubtful accounts 72,000
P 3,528,000

During 2020, transactions relating to the accounts were as follows:

· Sales on account, P 38,400,000
· Cash received from collection of current receivable totaled P 31,360,000, after
discount of P 640,000 were allowed for prompt payment
· Customers’ accounts of P 160,000 were ascertained to be worthless and were
written off.
· Bad accounts previously written of prior to 2020 amounting to P 40,000 were
recovered
· The company decided to provide P 184,000 for doubtful accounts by journal entry at
the end of the year
· Accounts receivable of P 5,600,000 have been pledged to a local bank on a loan of P
3,200,000. Collections of P 1,200,000 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, 2020 is-
a. P 8,680,000 c. P 4,240,000
b. 9,840,000 d. 8,640,000

2. The allowance for doubtful accounts as of December 31, 2020 is-

a. P 8,000 c. P 184,000
b. 136,000 d. 176.000

3. The net realizable value of accounts receivable as of December 31, 2020 is-
a. P 8,544,000 c. P 8,504,000
b. 8,456,000 d. 4,104,000

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

5. Which of the following may be considered to be a primary objective of the auditor

in the examination of accounts receivable?
 a. Determine approximate time of collectability of receivables
b. Determine the relationships of receivables to sales
c. Determine the reasonableness of the sales figure
d. Establish validity and collectability of receivables

6. Confirmation, which is a specific type of inquiry, is the process of obtaining a

presentation or of an existing condition directly from a third party. Two assertions
for which confirmation of accounts receivable balances provides primary
evidence are-
a. completeness and valuation c. existence and completeness
b. valuation and rights and obligations d. rights and obligation and
existence

Solutions:
1. AR 3,600,000
Sales account 38,400,000
Bad debt recovered 40,000
Less:
Collection (32,000,000)
Written off (160,000)
Bad debt collection ( 40,000)
Collection -pledge ( 1,200,000
AR 12/31 8,640,000 3pts

2. Allowance for doubtful accounts=

72,000 +184,000+40,000-160,000
= P 136,000 3pts

3. NRV of AR= 8,640,000 - 136,000 = 8,504,000

4. A. disclosed in the statement or notes
5. D. establish validity and collectability of receivables
6. D rights and obligation and existence
PROBLEM NO. 2

Your audit client, Norway Corporation, provided for uncollectible accounts receivable
under the allowance method since the start of its operations to December 31, 2019.
Provisions were made monthly at 2 percent of credit sales; bad debts written off were
charged to the allowance account; recoveries of bad debts previously written off were
credited to the allowance account; and no year-end adjustments to the allowance
account were made. Norway’s usual credit terms are net 30 days.

The credit balance in the allowance for doubtful accounts was P 260,000 at January 1,
2020. During 2020, credit sales totaled P 18,000,000, interim provisions for doubtful
accounts were made at 2 percent of credit sales, P 180,000 of bad debts were written off,
and recoveries of accounts previously written off amounted to P 30,000. Norway
installed a computer system in November 2020 and an aging of accounts receivable was
prepared for the first time as of December 31, 2019. A summary of the aging is as
follows:
Classification by month of sale Balance in each category Estimated %
uncollectible
November-December 2020 P 2,280,000 2%
July-October 2020 1,200,000 15 %
January – June 2020 800,000 25 %
Prior to January 1, 2020 260,000 - 120,000 80 %

Based on the review of collectability of the account balances in the “prior to January 1,
2020” aging category, additional receivables totaling P 120,000 were written off as
December 31, 2020. Effective with the year ended December 31, 2019, Norway adopted a
new accounting method for estimating the allowance for doubtful accounts at the
amount indicated by the year-end aging analysis of accounts receivable.

QUESTIONS; Based on the above and the result of your audit, answer the following:
1. How much is the adjusted balance of the allowance for doubtful accounts as of
December 31, 2020?
a. P 537,600 . c. P 350,000
b. 633,600 d. 753,600
 2. How much is the doubtful accounts for the year 2020?
a. P 427,600 c. P 577,600
b. 547,600 . d. 457,600

_______allowance for DA________

Dr Cr
180,000 Beg 260,000
120,000 DA 547,600 ???
Recovery 30,000
______________________________________

Bal 537,600

3. The recorded allowance for doubtful accounts should be increased by-

a. P 283,600 c. P 187,600
b. 67,600 d. P 0

Required 537,600
Beg balance 260,000
2% x 18M 360,000
Recovery 30,000
Write off ( 300,000) 350,000
Increase 187,600
Audit of Notes Receivables
Remarkable Company had the following account balances on January 1, 2018:

Note receivables from sale of an idle building P 7,500,000

Note receivable from an officer 2,000,000

Transactions during the current year and other information relating to the receivables
are as follows:

The P 7,500,000 note receivable is dated May 1, 2017, bears interest at 9%, and
represents the balance of the consideration Remarkable Company received from the sale
of its idle building to Solid Company

Principal payments of P 2,500,000 plus interest are due annually beginning May 1, 2018.
Solid Company made its first principal and interest payment on May 1, 2018. Collection
of the remaining note installments is reasonably assured.

The P 2,000,000 note receivable is dated December 31, 2015, bears interest at 8%, and is
due on December 31, 2020.( NCA)

The note is due from the president of Remarkable Company, and is collateralized by
50,000 ordinary shares of Remarkable Company.

Interest is payable annually on December 31, and all interest payments were made
through December 31, 2018. The quoted market price of ordinary share was P 45 on
December 31, 2018.

On July 1, 2018, Remarkable Company sold a parcel of land to Boom Company for P
4,000,000 under an installment sale contract. Boom Company made a P 1,200,000 cash
down payment on July, 2018, and signed a 4 year 10% note for the P 2,800,000 balance

The equal annual payments of principal and interest on the note totaled P 883,320,
payable on July 1 of each year from 2019 through 2022.

The fair value of the land at the date of sale was P 4,000,000. The cost of the land was P
3,000,000. Collection of the note installments is reasonably assured.

7,500,000 May 2017

- 2,500,000 2018
5,000,000
2,500,000 2019 CA
2,500,000 2020 nCA
Questions:
Based on the above information:

1. Compute the total amount of current assets pertaining to notes receivables as

December 31, 2018
a. P 3,383,320 c. P 3,823,320
b. 3,543,320 d. 6,043,320

2. Compute the noncurrent assets pertaining to notes receivable as December 31,

2018
a. P 4,196,680 c. P 6,696,680
b. 6,416,680 d. 7,300,000