Wizards Enterprises loaned P1,000,000 to Washington Inc. on January 1, 2004.

The
terms of the loan require principal payments of P200,000 each year for 5 years plus
interest at 8%. The first principal and interest payment is due on January 1, 2005.
Washington made the required payments during 2005 and 2006. However, during 2006
Washington began to experience financial difficulties, requiring Wizards to reassess the
collectability of the loan. On December 31, 2006, Wizards determines that the remaining
principal payments will be collected, but the collection of interest is unlikely. The
prevailing
interest rate for similar type of note as of December 31, 2006 is 10%.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The present value of the expected future cash flows as of December 31, 2006 is
P556,640
2. The loan impairment for the year 2006 is
P91,360
3. How much is the interest income for the year 2007, assuming that Wizards'
assessment of the collectability of the loan has not changed.
P28,531

For Problems 1,3 and 4, go to:

Use ur dwcc account.

https://drive.google.com/file/d/1eVQ9Lie4p9isirWtWfCZHpouOLBDF23P/view?usp=sharing

THEORIES
1. 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.”

2. 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

3. 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.

4. 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 confirmations for at least 50% of the total dollar amount of the receivables.
c. Require confirmation of all receivables from agencies of the federal government.
d. Require that confirmation requests be sent within 1 month of the fiscal year-end.

5. Negative confirmations 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.