AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS
MODULE 01 – FS AUDIT
1. FINANCIAL STATEMENT AUDIT
 An entity’s financial statements are the
representation and responsibility of the
entity’s management (STATEMENT OF
MANAGEMENT RESPOSIBILITY).
External users, mainly investors and
other stakeholders, use the information
contained in the financial statements in
making judgements about the enterprise
to formulate decisions. A CPA, acting as
internal auditor, lends credibility to the
financial statements by expressing an
opinion (AUDITOR’S REPORT) as to
the fairness by which financial
statements are presented. Financial
audits aim to determine whether the
financial statements prepared are in
accordance with the appropriate
financial reporting framework.
2. FINANCIAL STATEMENT ASSERTIONS – P1
1) EXISTENCE OR OCCURRENCE –
management asserts that all assets,
liabilities and equity reported in the FS
actually existed at the reporting date
and that reported income earned and
reported expenses are incurred during
the reporting period.
2) COMPLETENESS – management
asserts that all transactions and
accounts that should be presented in
the FS are the results of the
transactions and other events that
actually occurred during the reporting
period.
3) RIGHTS AND OBLIGATIONS –
management asserts that the entity has
property rights to or control over all
recorded assets, and that all liabilities
represent obligations at the reporting
date.
4) MEASUREMENT AND ALLOCATION –
management asserts that the
measurement bases of all assets,
liabilities, equities, income, and
expenses are appropriate in accordance
with the reporting standards and that
revenues, costs, and expenses are
recognized during the proper reporting
period based on the appropriate
revenue and expense recognition
principles.
5) PRESENTATION AND DISCLOSURE –
management asserts that all FS
components are presented, classified
and described properly and all relevant
and required disclosures are included
and that the FS elements presented and
related notes represent the substance
and not merely the legal form of the
recorded transactions.
3. THE AUDIT PROCESS
 The audit process involves both an
investigation and report. This process
starts when a reporting entity engages
the services of an independent auditor
and ends when the auditor issues an
audit report. The auditor evaluates the
internal control procedures of the client
to determine the extent and types of
audit procedures necessary to gather
evidence as basis for an opinion.
4. MAJOR PHASES IN FINANCIAL
STATEMENT AUDIT
a. Pre-engagement activities
b. Audit planning and evaluation of internal
control
c. Evidence gathering
d. Reporting
4A. PRE-ENGAGEMENT ACTIVITIES
Pre-engagement activities include
procedures conducted to determine whether or
not to accepts a new engagement or retain an
existing client. It is designed to manage
conflicts and threats to the auditor.
In repeat engagements, subsequent
relationships established shall be assessed to
determine whether independence has not be
compromised.
The auditor, likewise, should determine
whether the audit team possess the necessary
skills, resources, and competence to complete
the audit within the period specified by the
engagement. If the engagement is accepted or
retained, the terms shall be documented in an
engagement letter.
4B. AUDIT PLANNING
Audit planning involves evaluation of
internal control to determine the extent of audit
procedures to be performed and includes:
1) Obtaining an understanding of the client,
its business, industry and accounting
policies.
2) Obtaining an understanding of the
client’s internal control.
3) Assessing materiality.
4) Identifying audit objectives.
5) Determining whether reliance can be
place on certain controls in the system.
6) Determining the nature, extent, and
timing of substantive tests to be
performed.
7) Designing and finalizing the audit
program.
4C. EVIDENCE GATHERING OR AUDIT
DOCUMENTATION (AUDIT WORKING
PAPERS)
Most common audit procedures applied
by the auditor:
1) Confirmation – obtaining written third
party statements
2) Physical count and observation
3) Inquiry – obtaining written and oral
information from management,
employees and others
4) Documentation – obtaining internal and
external evidence (contracts, minutes of
meetings, bank statements)
5) Comparisons – establishing trends and
valid relationships of data
6) Recalculations – establishing
correctness of account
7) Mechanical tests of data – verifying
mathematical accuracy of accounting
data (tracings, footings and cross
footings)
4C1. TYPICAL EXAMPLES OF AUDIT
DOCUMENTATION (AUDIT WORKING
PAPERS)
1) Information that enables the auditor to
accept or reject an entity as a client.
2) Information that enables the auditor to
determine the audit approach.
3) Information as whether a particular
financial statement account balance is
complete, valid and accurate.
4) Information relating to the
completeness, validity and accuracy of
the financial statements taken as a
whole including information relating to
the consistency of the financial
statements with the auditor’s knowledge
of the business.
4C2. FORM, CONTENT AND EXTENT OF
AUDIT DOCUMENTATION (AUDIT WORKING
PAPERS)
1) The size and complexity of the entity.
2) The nature of the audit procedures
performed.
3) The identified risks of material
misstatements.
4) The significance of audit evidence
obtained.
5) The nature and extent of exceptions
identified.
6) The need to document a conclusion or
the basis for a conclusion not readily
determinable from the documentation of
the work performed or evidence
obtained.
7) The audit methodology and tools used.
4C3. AUDIT DOCUMENTATION (AUDIT
WORKING PAPERS) SERVES TO
1) Organize and coordinate all phases of
the audit engagement
2) Provide evidence to demonstrate that
the planned audit procedures were in
fact performed.
3) Aid partners in reviewing the work
performed by audit staff members.
4) Provide evidence that the auditors
complied with the auditing standards.
5) Record judgments involved in forming
the audit opinion.
6) Aid in planning and conducting future
audits of the client.
7) Provide information in rendering
additional services to the audit client.
4C4. MAJOR TYPES OF AUDIT WORKING
PAPERS
1) Audit administrative working papers.
2) Working trial balance and lead
schedules.
3) Adjusting journal entries and
reclassification entries.
4) Supporting schedules, analyses,
reconciliations, and computational
working papers and
5) Corroborating documents.
4C5. AUDIT DOCUMENTATION – CURRENT
FILE
1) Working trial balance.
2) Summary of audit adjusting and
classifying entries
3) Lead schedule.
4) Bank reconciliation.
5) Aged accounts receivable.
6) Minutes of meetings during the reporting
period
7) Narrative documentation summarizing
bases for resolutions involving
uncertainties.
4C6. AUDIT DOCUMENTATION –
PERMANENT FILE
1) Articles of Incorporation
2) Corporate by laws.
3) Copy of pension contract with funding
agency.
4) Copy of trust indentures for long term
debt.
5) Copy of effective collective bargaining
agreement.
4D. REPORTING
The auditor should review and assess
the conclusions drawn from the audit evidence
obtained as the basis for the expression of an
opinion on the financial statements. The
auditor’s report should contain a clear written
expression of an opinion on the financial
statements taken as a whole.
Based on the results of the evaluations
made, the auditor would determine what form of
audit report is appropriate in the circumstances.
4D1. TYPES OF AUDIT REPORTS –
UNMODIFIED OPINION
When the auditor concludes that the
financial statements are presented fairly, in all
material respects, with applicable financial
reporting framework (International Financial
Reporting Standards - IFRS), an unmodified (or
unqualified) opinion would be appropriate.
An unqualified opinion should be
expressed when the auditor concludes that the
financial statements give a true and fair view, in
all material respects, in accordance with the
applicable financial reporting framework
(International Standard on Auditing – ISA) 700
4D2. TYPES OF AUDIT REPORTS –MODIFIED
OPINION
When based on audit evidence
obtained, the FS as a whole are not free from
material misstatement or when sufficient
appropriate audit evidence could not be
obtained to conclude that the FS as a whole are
free from material misstatement, a modified
opinion is expressed. It may take the following
form:
(1) qualified opinion
(2) adverse opinion
(3) disclaimer opinion
4D3. TYPES OF AUDIT REPORTS –MODIFIED
OPINION - QUALIFIED
1. QUALIFIED OPINION - should be
expressed when either (a) sufficient appropriate
audit evidence was obtained, but the auditor
concludes that misstatements exist, individually
or in the aggregate, that are material but not
pervasive to the FS or (b) the auditor is unable
to obtain sufficient appropriate audit evidence on
which to base the opinion and that the possible
effects on the FS of undetected misstatements,
if any, could be material but not pervasive. A
qualified opinion should be worded as being
“except for the effects (or possible effects) if the
mater to which the qualification relates.
4D4. TYPES OF AUDIT REPORTS –MODIFIED
OPINION - ADVERSE
 2. ADVERSE OPINION - should be
expressed when the effects of misstatements
are both material and pervasive. This opinion
applies where sufficient appropriate evidence
was obtained, but the auditor concludes that
misstatements, individually or in aggregate, are
both material and pervasive to the FS. An
adverse opinion states that the FS do not
present fairly the financial position, financial
performance, and cash flows of the entity
audited.
4D5. TYPES OF AUDIT REPORTS –MODIFIED
OPINION - DISCLAIMER
3. DISCLAIMER OPINION - basically
means giving no opinion. Should be expressed
when the possible effects of undetected
misstatements, if any, could be material and
pervasive. This opinion is expressed when the
auditor is unable to obtain sufficient appropriate
evidence on which to base the opinion, and
concludes that the possible effects of undetected
misstatements, if any, could be both material
and pervasive. This opinion also applies to
extremely rare circumstances wherein
conditions of major uncertainties and their
possible effects on the FS, it is not possible to
form an opinion.
having been charged to Investment
Account
6) Except for equipment purchased on
June 2014 for P20,000.00 cash, all
equipment were acquired at the
inception of the Company 3 years ago.
Depreciation for 2014 has not been
recorded.
7) Prepaid expenses include P4,800.00
insurance premium on a one year
insurance policy taken on October 1,
2014
8) Unearned rent income on December 31,
2014 amounted to P10,000.00 (Trial
Balance shows Unearned Rent Income
of P12,800.00)
9) Accrued expenses on December 31,
204 amounted to P54,000.00 (Trial
Balance shows accrued expenses of
P51,000.00)
MODULE 02 -CASH AUDIT
ANSWERS TO AJE EXERCISES

5. REVIEW OF AUDIT ADJUSTING ENTRIES

1) The cash account included equipment

acquisition fund amounting to
P60,000.00
2) A physical inventory taken on December
31, 20xx revealed goods costing
P600,000.00 (Trial Balance shows Beg
Inventory of P584,000.00, Purchases of
P2,424,000.00
3) Goods purchased under FOB shipping
point and verified to have been shipped
by the supplier on December 28, 20xx
were received and recorded on January
4 the following year P50,000.00
4) The ADA should be adjusted to 5% of
AR (AR balance as of December 31,
20xx is P615,000.00 while ADA is
P21,000.00)
5) The company purchased 100 shares of
its P100 par value Ordinary Share
capital for P30,000.00, the amount
1. AUDIT OBJECTIVES – CASH
 Obtain an understanding of internal
control procedures adopted by the
company to safeguard cash;
 Establish the existence of the recorded
amount of cash;
 Establish the completeness of recorded
cash;
 Determine that the client has rights to
recorded cash; and
 Establish that the presentation and
disclosure of cash is appropriate.
2. INTERNAL CONTROL OVER CASH
RECEIPTS
1) No one person should be assigned the
function of cash handling and record
keeping.
2) Official receipts must be pre-numbered
and sequentially used.
3) Each day’s cash receipts must be
deposited intact.
4) Deposits should be matched with official
receipts. The person reconciling the
OR’s with the deposit slips made should
be one other than the person making
the deposit.
5) Cash sales should be recorded at the
point of sale (POS).
6) Cash register totals and credit cards
machines should be balanced daily. Any
resulting cash shortage should be
monitored.
3. INTERNAL CONTROL OVER CASH
DISBURSEMENTS
1) All disbursements must be properly
authorized and adequately documented.
The adoption of voucher system, which
requires review of supporting
documents as support for
disbursements, is highly recommended.
2) Payments must be made by checks,
electronic fund transfer, or from PCF.
3) Issued checks must be sequentially
numbered.
4) Checks should be signed by at least two
persons to prevent fictitious
disbursements.
5) Check signatories shall be persons in
appropriate high levels in the
organization.
6) Checks issued must be payable to
specific entities (company or person)
and must not be made payable to CASH
7) Periodic bank reconciliation must be
made by a person independent of the
authorization, check signing function
and cash receipts function.
Reconciliation must be made at least
once a month to ensure all deposits and
disbursements are properly made and
recorded by both the entity and the
bank.
4. AUDIT PROCEDURES – CASH ON HAND
1) To validate the existence of cash on
hand, the auditor shall conduct a cash
count.
2) The count must be conducted in the
presence of the cash custodian. The
custodian must be present throughout
the count.
3) The auditor must obtain the signature of
the custodian certifying that the fund
was retuned intact.
4) The count of cash on hand balances
and the count of highly liquid
instruments must be made
simultaneously to avoid any transfer of
funds to temporarily conceal cash
shortage.
4B1. AUDIT PROCEDURES – CASH ON HAND
– CASH COUNT
4B2. CASH COUNT - EXERCISE

4B3. CASH COUNT – ANSWER

5. AUDIT PROCEDURES – CASH IN BANK

1. The auditor tests of control of cash

receipts help determine that cash payment
intended for the company are received, are
properly and promptly recorded, and are
promptly and properly deposited in the
company’s bank accounts. TOC include:

a. footing cash receipts records;

b. testing the posting of cash receipts to

ledger;

c. comparing recorded receipts with

bank statements;

d. comparing deposit slips with recorded

receipts; and

e. comparing recorded receipts with

details in the official receipts.

5A1. AUDIT PROCEDURES – CASH IN BANK

Details in the official receipts for cash

collections must be matched with the credit
postings to the customer’s subsidiary ledger.
Such detailed tracing may uncover lapping, a
fraud referring to misappropriation of collections
from customers, delaying its recording and
posting the subsequent collections to the
account of the customer who previously made
the payment. Lapping is most likely to occur
when an employee receiving collections from
customers has access to the accounts
receivable records
5A2. AUDIT PROCEDURES – CASH IN BANK
1. The auditor tests of control of cash
disbursements help determine that cash
disbursements are properly authorized and
made only for goods and services that are
actually received. These tests include:
a. proving the footing cash
disbursements journal or check register;
b. tracing totals to the general ledger;
c. comparing checks returned with the
entries in the cash
disbursements with bank statements;
d. reconciling recorded disbursements
with bank statements.
5A3. AUDIT PROCEDURES – CASH IN BANK
1. Ledger postings of cash receipts and
cash disbursements must be reviewed to spot
unusual entries that may require special
investigation.
2. The auditor must request
confirmation of bank balance for each bank
account maintained by the client. The bank
confirmation provides evidence in respect to
existence, ownership and accuracy of cash
balances. The bank confirmation request must
be on the auditors’ letterhead and must be sent
to all banks where the client has dealings/
3. The auditor when requesting for
confirmation should send a self addressed
envelopes, so that replies are sent directly to the
auditor
4. Should the amount indicated in the
confirmation request returned by the bank does
not agree with the ledger balance or when
repeated non-responses are obtained from the
financing institution, the auditor shall obtain
copies of the bank reconciliation prepared by the
client. A bank reconciliation is an audit evidence
supporting the financial statement assertions of
existence or occurrence, cut-off, accuracy and
completeness related to cash in bank.
5. The auditor has to test the clerical
accuracy of the reconciliation and the details of
the supporting schedules
6. If client maintains cash accounts with
at least 2 separate banks, a bank transfer
schedule shall be prepared showing transfers of
cash balances from one bank to another.
6. REPORTING AN ITEM IN THE STATEMENT
OF FINANCIAL POSITION – AN EXERCISE -
12312021 FS
a. A P90,000.00 check received from a
customer dated 02012021 is on hand
b. A customer’s check for P100,000.00
was included in the December 20,
deposit. It was returned by the bank
stamped DAIF. No entry has been
made to reflect the return
c. Company placed a P200,000.00 unit
investment trust fund in the portfolio
balanced fund with the bank in
November. As of December 31, the
fund has a fair value of P203,400.00.
The chief accountant proposes to report
the P200,000.00 as Cash in Bank
d. Company has P20,000.00 PCF. As of
December 31, the fund cashier reported
expense vouchers covering expenses in
the amount of P16,700.00 and cash of
P3,200.00
e. A cashier’s check of P20,000.00
payable to the Company is in the cash
drawer, it is dated December 29
f. 3 checks dated December 31, 2021
totaling P465,000.00, payable to
vendors who have sold merchandise to
the Company on account were not
mailed by December 31, 2021. They
have not been entered as payments in
the check register and ledger
g. Prior to December 30, Company left a
note that matures December 31, 2021
with its bank for collection. The note is
for P200,000.00 and bears interest at
9% having been outstanding for 3
months. As yet, Company has not
 heard from the bank about collection but
it is confident of a favorable outcome
because of the high credit rating of the
maker of the note. The Company plans
to include the P200,000.00 interest in its
cash balance.
MODULE 03 – RECEIVABLES AUDIT
1. SALES CYCLE OR REVENUE CYCLE
The revenue cycle is the set of activities
that brings about delivery of goods or services to
customers, who ultimately pay in cash. This
cycle is composed of two phases: (1) the
physical phase; and (2) financial phase. In the
physical phase, goods or services are delivered
to the buyer, in the financial phase, the buyer
makes payment for goods and services
delivered.
The revenue cycle is described in the
following sequential activities: receiving
purchase order from customer; checking
inventory status; obtaining credit approval;
preparing shipping and packing documents;
shipping the goods and verification of
shipments; preparing the sales invoice; sending
statements to customers; and receiving
payment.
2. INTERNAL CONTROL OVER REVENUE
CYCLE
Internal control over sales transactions
is best achieved by having separate
departments (or individuals) responsible for the
set of activities in the revenue cycle. An entity
has to segregate the functions of transaction
authorization, record keeping and custody of
asset. In companies where it is not practical to
separate such duties, increased supervision is
an alternative.
The revenue cycle starts with the
preparation of the sales order which specifies
the terms of the customer’s order for guidance
by stores department and the shipping
department. Such sales order is subject to the
approval of the credit department (for sales on
account). The approved sales order is
forwarded to the stores department for the
issuance of goods to the shipping department.
2A. INTERNAL CONTROL OVER REVENUE
CYCLE
The shipping department prepares a
shipping document and forwards the goods to
the common carrier, which in turn issues a bill of
lading. A copy of the shipping document is
transmitted to the billing department for the
preparation of sales invoice. Prices, quantity
and payment terms are reviewed before the
sales invoice is sent to the customer.
Statements of accounts should be sent
to customers, at least once a month. Dormant
account should be reviewed and tested for
impairment. Approval shall be made for writing
off receivables assessed to be uncollectible.
Accounts written off should be transferred to a
separate ledger without the necessity of
manipulating the accounting records.
3. AUDIT OBJECTIVES
1) Consider internal control over
receivables and sales transactions.
2) Determine the existence of receivable,
that the client has rights to these asset,
and the occurrence of sales
transactions.
3) Establish the completeness of recorded
receivables and sales transactions.
4) Determine that the receivables are
measured at appropriate amortize cost.
5) Establish that the presentation and
disclosure of receivables and sales are
appropriate.
4. AUDIT PROCEDURES
The auditor has to update information
on client business risk and analyze potential
motivations to or circumstances that misstate
sales. The auditor must understand client
operations and identify the proper revenue
recognition principle applicable to business
operations.
In relation to revenue and receivables,
an understanding of the entity’s operations and
its environment will assist the auditor in
developing (a) an expectation of total revenues
by understanding the company’s products,
markets and its maximum sales volume, (b) qn
understanding of gross margins by
understanding products, market share and
competitive advantage, and (c) an expectation of
receivable based on average collection periods
for the client and the industry as a whole.
Because of normal cutoff errors or
misapplication of the appropriate revenue
recognition principle, there is a rebuttable
presumption that the amount of revenue
recorded by the enterprise contains some
misstatements. The presence of any of the
following increases inherent risk and the
probability of material misstatement: (a) unusual
sales terms, (b) unusually large amounts of
sales recorded towards the end of the reporting
period, (c) sales made with recourse or that
have significant returns, (d) unusual
concentration of sales made to particular
customers, and (e) shipments to customers
without corresponding sales orders.
Substantive tests of revenue for
existence occurrence and valuation include
vouching of recorded sales transaction back to
customer order and shipping document.
Quantities on customer’s order must be
compared with quantities shipped and billed.
Cutoff tests can be performed for sales, sales
return and cash receipts. Cutoff test provides
evidence whether transactions are recorded in
the proper accounting period. The cutoff period
is usually several days before and after the end
of the reporting period. The extent of cutoff tests
depends on the strength or effectiveness of
clients controls over the revenue cycle.
Examination of cash sales is linked to
the examination of cash receipts from such
sales. Random samples of cash sales, based
on sales invoice, can be traced to the cash
receipts records and reconciled with bank
deposits. Pricing must be checked to inventory
records. To test reasonableness of the recorded
cash sales, expectations are set for change in
sales in figures in comparison with previous
year’s sales. An amount beyond the
expectations may require further analysis and
investigation.
Similar attention must be given to credit
sales. A sample of sales invoices must be
traced to order slips (or similar documents),
reconciled to pricing information, warehouse
requisitions and delivery receipts. The auditor
has to obtain reasonable assurance that the
credit sale was recorded in the proper reporting
period, that is when the sale is actually made.
To obtain assurance that all shipments are
billed, the auditor should obtain a sample of
shipping documents issued during the year and
compare them to sale invoices.
To establish correctness of the balance
of accounts receivable in the GL, it is necessary
for the auditor to obtain a list of the AR from the
SL and reconcile the total to the balance in the
GL. As a standard audit procedure, AR must be
confirmed. Confirmation with debtors provide
assurance that no lapping or any other form of
manipulation has been resorted to by any
employee of the entity. The auditing firm must
mail directly the confirmation request, with
attached business reply envelope, to the client’s
customers. Customers are requested to send
back the reply to the auditing firm to eliminate
any opportunity for client employee to alter such
reply. Confirmations provide reliable external
evidence about the existence of recorded AR,
completeness and correctness of recorded cash
collections, sales discounts and sales returns
and allowances.
The auditor has to evaluate whether to
use the POSITIVE FORM or NEGATIVE FORM
of confirmation. The positive form of
confirmation request that the customer to reply
whether or not the customer agrees with the
amount indicated in the confirmation request.
The negative confirmation requests the debtor to
reply only when the balance shown is incorrect.
POSITIVE CONFIRMATION – provide
more competent evidence, it requires a
response and as such may require a second
request if customer does not respond to the first
request and repeated non reply will mean the
auditor has to use alternative procedures to
verify existence of AR
NEGATIVE CONFIRMATION – less
expensive because non response is assumed to
mean agreement with the balance in
confirmation request, may only be used if the
account consists of a large number of small
balances, inherent and control risk for AR is low,
and the auditors have no reason to believe that
the customer will not disregard the confirmation
request.
Non-agreement by the customer on
amount indicted in the confirmation request is
referred to as an exception. Exceptions may be
due to timing differences in the execution and
recording of transaction, disputed item of goods,
customer errors or client errors. The auditor
must determine the reason of exception,
otherwise unexplained differences noted by the
customers and significant time lag between the
record of the customer and the record of the
client for cash remittances may lead to a
conclusion that fraud exists in the collection
process.
Unexplained differences noted by
customers in the AR confirmations and
significant delays between the date the
customer states a payment was made and the
date of payment was recorded by the firm may
lead to a conclusion that fraud exists in the
collection process.
To establish collectability, the auditor
has to review credit and collection policies and
procedures and analyze the age of the
receivables. The test for impairment of
receivables involves two steps (1) test
individually for impairment, and (2) test the
receivables as a group.
Difficulty by the client in making
collections on time, repeated defaults by client’s
customer, and subsequent declaration of
bankruptcy are some indicators that individual
accounts are impaired and therefore need
derecognition or higher rates of allowances for
uncollectible accounts.
The group testing normally involves
classification of receivable by age. Client
normally prepares aging schedule manually or
from a computerized system of AR at the
reporting date. The auditor uses this aging
schedule and group receivables according to
age to evaluate adequacy of the clint’s
allowance for uncollectible accounts. Other than
for estimating the uncollectible accounts, the
aging schedule can be used to validate the
control account balance, select customer
accounts for confirmation, and identify amounts
due from related parties (for disclosure
purposes).
In addition to the aging of AR, the
auditor may also examine credit files for large
accounts, review subsequent collections of
accounts and perform analytical procedures
useful in evaluating the appropriateness of the
balance of the allowance for uncollectible
accounts.
Substantive tests on NR and related
interest revenue include inspection of the notes,
independent computation of interest earned and
analytical review procedures. Notes must be
examined as to date of maturity, interest rate
and payee. The most effective verification of
interest revenue consists of test of
reasonableness of interest earned during the
year on NR. Ratios and trends can be used as
indicators of reasonableness of amounts.
Receivables from related partied should
be properly disclosed. Audit procedures that
identify related party transactions include
reviewing the AR SL and trial balance and
inquiries from the management. The names of
related parties must be communicated to all
members of the audit team so that they are
alerted for related party transactions.
Receivables that are sold with recourse,
discounted or pledged as collateral can be
identified through management inquiry, scanning
cash receipts journal for large inflows from
unusual sources, bank confirmations, which
include information on obligations and terms and
reviewing the minutes of meetings of the BOD.
5. PROBLEM: ADJUSTMENTS BASED ON
SALES CUTOFF TEST
The ff: are the balances as of December
31, 2015 of Roman Company in relation to your
audit of the company’s 2015 FS:
The company uses the periodic inventory
system, and the merchandise inventory balance
above is the result of the physical count
conducted on December 30, 2015 at the close of
business hours. All merchandise received up to
December 30, 2015 have been included in the
count and all merchandise shipped to customers
up to December 30, 2015 have been eliminated
in the count. It takes at least 3 days to reach
destination.

You conducted a sales cutoff test and

the ff information has revealed: December 2015
recorded sales

5B. PROBLEM: ADJUSTMENTS BASED ON

SALES CUTOFF TEST

You conducted a sales cutoff test and

the ff information has revealed: January 2016
recorded sales

6. PROBLEM: AGING OF ACCOUNTS

RECEIVABLE

***The goods were made to customer’s

specifications, were completed on 12302015 but
were requested by the customer to ne delivered
in 2016.

Goods out on consignment costing 6A. PROBLEM: AGING OF ACCOUNTS

P80,000.00 and with sales price of P120,000.00 RECEIVABLE
were not included in the physical count. These
goods have been recorded as sales when they The estimated bad debt rates below are
were shipped out to consignees. Verification based on F’s Company’s receivable collection
with consignees indicated that only 60% of these experience:
goods had been sold as of December 31, 2015

The company has already set up Cost of

sales account in its books, after conducting the
physical count.

5D. ANSWER: ADJUSTMENTS BASED ON

SALES CUTOFF TEST – AUDIT
ADJUSTMENTS AT DECEMBER 31, 2015
 The allowance for uncollectible accounts
had a debit balance of P5,000.00 on December
31, 2015 before adjustment:

AUDIT ADJUSTMENT:

7. MEASUREMENT, PRESENTATION AND

DISCLOSURE IN THE FINANCIAL
STATEMENTS

Receivables are assets that are

generally held by the enterprise under the
business model” held for collection consisting
solely of principal plus interest (SPPI).
Following the classification of financial assets
under IFRS 9, receivables are generally
measured at amortized cost, being the present
value of future cash inflows reduced by any
allowance provided for impairment.