Course / Learning Packet in (Pre 2) : Auditing & Assurance Concepts & Application 1

COURSE / LEARNING PACKET IN
(PrE 2)
Auditing & Assurance Concepts & Application 1

Prepared by
REXMAR CHRISTIAN L. BERNARDO

1st Semester
SY 2020-2021 MISSION
VISION r MABINI COLLEGES aims to provide quality instruction, research

and extension service programs at all educational levels as its
monumental contribution to national and global growth and
development.
“MABINI COLLEGES, Inc. shall MABINI COLLEGES INC., Specifically, it transforms students into:
Course Packet Format:
cultivate Adapted
a CULTURE OFfrom Ave. Maria College
EXCELLENCE in education Daet, Camarines Norte -
-
God fearing;
Nation Loving;
Earth-Caring;
COLLEGE OF BUSINESS ADMIISTRATION AND ACCOUNTANCY -
- Law-Abiding;
- Productive; and
- Locally and Globally competitive persons.
Page 1 of 58
LETTER TO STUDENTS
My Dear Students,
Welcome to the next level of your chosen course. You are almost at the middle of your
journey towards being an accountant. Hence, there is a great need for you to be more serious in
taking this another challenging subject. Your heart for your future profession will help you get
more excited as you take this subject.
After finishing subjects that provided you with the most fundamental knowledge in the
accounting profession, you should be ready for this one that will help you learn in mastering the
skills in applying standards procedures to specific accounts of the financial statements. This will
provide you with knowledge and skills on how you will manage your appreciation and application
of accounting principles covering the assets, financial and nonfinancial. Experiencing this as
students will greatly help you apply all principles in handling your future battle especially in your
board examination.
.
You have to make it sure that you can able to successfully perform each activity in every
module. In some modules, activities serve as my measure of knowing what you know and what
you do not know yet before giving my inputs. Majority of them serve as your venue to show what
you understood and learned from the lessons. These activities will help you succeed in performing
assessment tasks after every module.
Are you ready? Then buckle down for learning. I am with you in this journey.
Sincerely yours,
Sir Rexmar
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MISSION
VISION
MABINI COLLEGES aims to provide quality instruction,
research and extension service programs at all educational
levels as its monumental contribution to national and global
“MABINI COLLEGES, Inc. growth and
shall cultivate a CULTURE MABINI COLLEGES INC., Specifically, it transforms students into:
OF EXCELLENCE in
education Daet, Camarines Norte -
-
God fearing;
Nation Loving;
- Earth-Caring;
COLLEGE OF BUSINESS ADMIISTRATION AND ACCOUNTANCY -
-
Law-Abiding;
Productive; and
- Locally and Globally competitive
persons.
TABLE OF CONTENTS
Contents Page No.

Cover Page i
Letter to Students ii
Table of Contents iii
Course Outline iv
PRELIM
Week 1-2 Module 1: Overview of Audit Process, Pre-engagement Activities,
Audit Planning and Transaction Cycles
1-6
Activity 1: The different phase of an audit.
Activity 2: Describe the difference of audit strategy, audit plan and audit program.
Activity 3: Describe audit risk and its components and how will it affect the audit
procedures.
Week 3-5 Module 2: Audit of Cash
Activity 1: Assertions addressed by audit procedures for cash and cash equivalents 7-14
Activity 2: Prepare a bank reconciliation and Proof of Cash
MIDTERM
Week 6-8 Module 3: Audit of Receivables
Activity 1: Assertions addressed by audit procedures for receivables, sales and 21-15
related accounts.
Activity 2: Calculate the correct balances of receivables and related account.
Activity 3: Define and identify the different classification of receivables.
Week 9-10 - Module 4: Audit of Inventories
Activity 1: Identify assertions addressed by audit procedures for inventories,

cost of sales and related account.
Activity 2: Compare and contrast perpetual and periodic inventory system. 26-33
Activity 3: Calculate the correct balance of inventory and related accounts.
PRE-FINAL
Week 11-14 Module 5 Audit of Property Plant and Equipment
Activity 1: Identify assertions addressed by audit procedures for property, plant

and equipment and related accounts.
Activity 2: Compute for the capitalizable borrowing cost. 34-39
Activity 3: Calculate the correct amount of property plant and equipment and its
related accounts.
FINALS
Week 15-16 Module 6: Audit of Investment (Equity Securities and Associates)
Activity 1: Identify assertions addressed by audit procedures for investments and

related accounts.
Activity 2: Differentiate the accounting for FVTPL, FVTOCI and FAAC 40-44
Activity 3: Compare and contrast the equity method and the cost method of
accounting for investment in associate.
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Week 17-18 Module 7: Audit of Intangible Assets
Activity 1: State the initial measurement of intangible assets that are (a)
externally acquired and (b) internally generated.
Activity 2: State the subsequent measurement of intangible assets that (a) 45-49
have finite useful life and (b) indefinite useful life.
MISSION
MABINI COLLEGES aims to provide quality instruction, research

and extension service programs at all educational levels as its
monumental contribution to national and global growth and
VISION development.
“MABINI COLLEGES, Inc. MABINI COLLEGES INC., Specifically, it transforms students into:
shall cultivate a CULTURE Daet, Camarines -

-
-
God fearing;
Nation Loving;
Earth-Caring;
OF EXCELLENCE in
Norte
- Law-Abiding;
- Productive; and
education - Locally and Globally competitive persons.
COURSE OUTLINE
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Course
REXMAR CHRISTIAN L. BERNARDO
Facilitator
Course Code
PrE 2- Auditing & Assurance Concepts & Application 1
and Title
This course covers the detailed discussion, appreciation, and application of auditing principles
covering the assets, financial and nonfinancial. Emphasis is given on the interpretation and
Course
application of theories of accounting in relation to cash, temporary investments, receivables,
Description
inventories, prepayments, long term investments, property, plant and equipment, intangibles, and
other assets, including financial statement presentation and disclosure requirements.
Cognitive
Demonstrate the understanding and mastering the skills in applying standards procedures to
specific accounts of the financial statements.
Affective
Course Draw educational implications of research findings related to child and adolescent learning
Outcomes and development along with the biological, linguistic, cognitive, social and psychological dimensions
Psychomotor
Perform specific skills, competencies, and point of view needed by professionals, such as
professional skepticism, an essential point of view needed as an accountant.
No. of Course
54hrs.
Hours
Time Frame Course Content

Learning Modalities (depending on the needs of every student)
Prelims (Weeks
a. On-line Learning c. combination of a and b
1-5)
b. Home learning aided by the modules
Week Lessons (with Activities) and Instructors Activities Students Activities and Outputs
Conducting Orientation on the Subject

Presenting the course outline
Giving the first Module
Getting oriented about the course
Module 1: Overview of Audit Process, Pre-
engagement Activities, Audit Planning and Transaction Receiving the first Module
Cycles
Lesson1: Audit Process and Pre-engagement

Activities
1-2 Lesson 2: Audit Planning
Lesson 3: Transaction Cycles Test of Controls
Activity 1: The different phase of an audit. Accomplished seat works and quizzes
Activity 2: Describe the difference of audit through google classroom.
strategy, audit plan and audit program.
Activity 3: Describe audit risk and its components On line recitations through zoom
and how will it affect the audit procedures. meeting or fb messenger (if possible)
Activity 4: Identify possible controls in each
transaction cycle.
Evaluating the submitted outputs of the students

3-5 Reminding themselves of what they
Recapping of the past lessons to connect to the next learned from the first module
lessons in the second module
Module2: Audit of Cash Accomplished seat works and quizzes

through google classroom.
Lesson 1: Substantive Test of Cash
Lesson 2: Cash and Cash Equivalents On line recitations through zoom
meeting or fb messenger (if possible)
Activity 1: Assertions addressed by audit
procedures for cash and cash equivalents
Activity 2: Prepare a bank reconciliation and
Proof of Cash
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PRELIM EXAMINATION

Mid- Term
(Weeks 6-10)
Lessons (with Activities) and Instructors Activities Students’ Activities and Outputs
Week
Welcoming students to the next part of their task
using the next modules
Module 3: Audit of Receivables

Lesson 1: Substantive Test of Receivables and
Sales
Accomplished seat works and quizzes
Lesson 2: Inventory recording systems (Periodic
6-8
inventory system, Perpetual inventory system)
On line recitations through zoom
meeting or fb messenger (if possible)
Activity 1: Assertions addressed by audit
procedures for receivables, sales and related accounts.
Activity 2: Calculate the correct balances of
receivables and related account.
Activity 3: Define and identify the different
classification of receivables.
Module 4: : Audit of Inventories
Lesson 1: Substantive Test of Inventories and

Cost of Sales
Lesson 2: Inventories
Activity 1: Identify assertions addressed by audit Accomplished seat works and quizzes
9-10 procedures for inventories, cost of sales and related through google classroom.
account.
Activity 2: Compare and contrast perpetual and On line recitations through zoom
periodic inventory system. meeting or fb messenger (if possible
Activity 3: Calculate the correct balance of
inventory and related accounts.
Evaluating students outputs

MID-TERM EXAMINATION

Pre-final
(Weeks 11-14)
Lessons (with Activities )and Instructors Activities Students’ Activities and Outputs
Week
Welcoming students to the next period of the
semester
Module 5: Audit of Property Plant and

Equipment
Lesson 1: Substantive Test of Property Plant, and
Equipment
Lesson 2: Property, Plant and Equipment
11-14 Accomplished seat works and quizzes
Activity 1: Identify assertions addressed by audit through google classroom.
procedures for property, plant and equipment and
related accounts. On line recitations through zoom
Activity 2: Compute for the capitalizable borrowing meeting or fb messenger (if possible
cost.
Activity 3: Calculate the correct amount of property
plant and equipment and its related accounts.
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PRE-FINAL EXAMINATION
Final a. On-line Learning c. combination of a and b
(Weeks 15-17) b. Home Learning aided by the modules
Lessons (with Activities )and Instructors Activities Students’ Activities and Outputs
Week
Module 6: Audit of Investment (Equity Securities

and Associates)
Lesson 1: Substantive Test of Investments
Lesson 2: Investment in Equity Securities
Lesson 3: Investment in Associate
Accomplished seat works and quizzes
15-16 Activity 1: Identify assertions addressed by audit
procedures for investments and related accounts. On line recitations through zoom
Activity 2: Differentiate the accounting for FVTPL, meeting or fb messenger (if possible
FVTOCI and FAAC
Activity 3: Compare and contrast the equity
method and the cost method of accounting for
investment in associate.
Module 7: Audit of Intangible Assets

Lesson 1: Substantive Test of Intangible Assets
Lesson 2: Intangible Assets Accomplished seat works and quizzes
Activity 1: State the initial measurement of through google classroom.
intangible assets that are (a) externally acquired and (b)
17-18 internally generated. On line recitations through zoom
Activity 2: State the subsequent meeting or fb messenger (if possible
measurement of intangible assets that (a) have finite
useful life and (b) indefinite useful life.
FINAL EXAMINATION
MAJOR OUTPUTS AND PROJECTS
Assessment
Tasks
1 Summarize the Audit Procedures for each account encounter in the semester
GRADING SYSTEM
General Prelim- 20%; Midterm 20%; Pre-final -30%; Final 20%; and Others (output) 10%
Per Rating
Period Periodical Examination- 40%; Class Standing 30%; Quizzes 20%; and Attendance -10%
Rubric for
Written Output Indicated in the Modules
Rubric for
Project Indicated in the Modules
CONSULTATION HOURS
M-S 2:30- 4:00 PM
LIST OF REFERENCES
Books Milan, Zeus Vernon B. (2018). Intermediate Accouting 1A. 2018 Edition Based on Philippine Financial
Reporting Standards. Bandolin Enterprise Publishing, Inc. Marcos Highway, Baguio City
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Assuncion, Ngina, Escala (2018). Applied Auditing, Real Excellence Publishing, Inc.
Marcos Highway, Baguio City
SIGNATURE OF INSTRUCTOR
MABINI COLLEGES, INC.

Daet, Camarines Norte
COLLEGE OF BUSINESS ADMINISTRATION

And ACCOUNTANCY
st
1 Sem., S.Y.2020-2021
PrE 2 Auditing & Assurance Concepts & Application 1

MODULE 1
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Title: Overview of Audit Process, Pre-engagement Activities, Audit Planning and Transaction Cycles
Name of Student:
Course/ year:
Class Schedule:
Date Submitted:
Module Overview:
In Module 1, you will read about the overview of the audit process. The topic covers the different
assertions to be used for specific accounts. For thorough learning, there are focus questions provided for the
students. These questions are basically relative to the insights students gotten from reading the content of the
module and its corresponding textbook reference. For Abstraction or Generalization of instructional content, a
brief lecture notes on audit procedure is provided here followed by a learning activity where students will
construct in good form a set of financial statements.
Learning Outcomes
After completing this module, students must have:
 Explain pre-engagement activities and the different phases of on audit.
 Understand the difference between audit strategy, audit plan and audit program
 Identify the activities in risk assessment.
 Identify different categories of transaction cycles.
LECTURE NOTES
Read this
Audit
An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between these assertions and
established criteria and communicating the results thereof.
Audit Process
The audit process is the sequence of different activities involved in an audit. This process normally includes the
following steps:
PHASE DESCRIPTION
1. Pre-engagement This phase will require a decision from the auditor whether or not to accept a new
client or continue relationship with an existing one. This process would require
evaluation not only of the auditors qualification, but also the integrity and auditability
of the clients financial statements.
Primary Objective: To minimize the likelihood of being associated to a client whose

management lacks integrity.
2. Audit planning Audit planning involves the development of an overall audit strategy, audit plan and
audit program. The auditor usually obtained more detailed knowledge about the
clients business and industry in order to understand the transactions and events
affecting the financial statements.
Preliminary assessment of risk and materiality is also made during this phase.
Primary Objective: To assess the different risks associated with the audit to determine
the nature, timing and extent or further audit procedures necessary to be performed.
3. Consideration of Since entitys internal control directly affects the reliability of the financial statements,
internal controls it is appropriate to study and evaluate these controls.
Primary Objective: To establish a basis for reliance on internal controls, in determining

the nature, timing and extent of audit procedures to be performed.
4. Evidence Using the information obtained in audit planning and consideration of internal
gathering controls, the auditor performs substantive test to determine whether entity s financial
(Substantive statements are presented fairly in accordance with financial reporting standards.
Testing) Substantive procedures could either be analytical procedures or test of details of
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transactions and balances.
This phase will always be performed by the auditor.
Primary Objective: To ascertain the degree of correspondence between the financial

statements prepared by clients management and the financial reporting framework.
With this, the auditor will be able to conclude whether or not the financial statements
are presented fairly in accordance with financial reporting standards.
5. Completing the Wrapping-up procedures are performed; conclusions reached are reviewed; and an
Audit overall opinion is formed during this phase.
Primary Objective: To assist the auditor in assessing conclusion reached is consistent

with evidence gathered.
6. Issuance of the In this stage, auditor prepares and issues audit report which describes the scope of the
Audit Report audit and states the auditors conclusion regarding the fairness of the financial
statements.
Primary Objective: To communicate the conclusions reached by the auditor to various

intended users.
7. Post-audit After completion of audit engagement, auditor performs procedures that will enable
responsibilities him/her identify areas for improvement in the current and future engagements.
Primary Objective: To assess and evaluate the quality of services delivered by the
engagement team.
(Image 1: Acceptance of Pre-Engagement)

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Agreeing the Terms of Audit Engagements
The auditor and the client shall agree on the terms of engagement. The agreed terms would need to be
recorded in an audit engagement letter or other suitable form of contract.
It is the interest of both client and the auditor that the auditor sends an engagement letter, preferably before
the commencement of the engagement to help avoid misunderstandings with respect to the engagement. The
engagement letter documents confirms:
A. Auditors acceptance of the engagement
B. Objective and scope of the audit
C. Extent of auditors responsibilities to the client
D. Form of any reports
Contents of engagement letter (RA FORMS) Acronym

The form and content of audit engagement letters may vary for each client, but they would generally include
reference to:
a. The presence of audit Risk
b. Unrestricted Access to whatever records
c. The financial reporting Framework used
d. Objective of the Audit
e. The form of any Reports or other communication
f. Managements responsibility
g. The Scope of the audit.
The auditor may also wish to include in the letter: (FRAP Reports) Acronym
a. Basis in which Fees are computed and any billing arrangements
b. Expectation of receiving Representation letter
c. Acknowledgement of management of terms of agreement
d. Arrangements regarding the Planning of the audit
e. Description of any other letters or Reports
Acceptance of a Change in Engagement
a. Stop performing the old engagement

b. Stop referring to the old engagement, except when
Is there a Yes the new engagement involves agreed upon
reasonable procedures
justification? c. Start performing the new engagement
a. Continue the original audit engagement

No
b. When prohibited to continue, withdraw from the
audit engagement.
Note: Every time withdrawal is made, the auditor

should consider the necessity of communicating the
reasons to appropriate level of management.
Circumstances that could lead to Change in Engagement
Circumstances Justifiable?
1. Change in circumstances affecting the need for the service Yes
2. A misunderstanding as to the nature of an audit or related services originally Yes
requested
3. A restriction on the scope of the engagement, whether imposed by No
management or caused by circumstances
4. If the change relates to information that is incorrect, incomplete or otherwise No
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unsatisfactory.
5. The auditor is unable to obtain sufficient appropriate audit evidence regarding No
assertions
AUDIT PLANNING (PSA 300)

Introduction
01 This standard establishes requirements regarding planning an audit.
Objective
02 The objective of the auditor is to plan the audit so that the audit is conducted effectively.
Responsibility of the Engagement Partner for Planning

03 The engagement partner is responsible for the engagement and its performance. Accordingly, the
engagement partner is responsible for planning the audit and may seek assistance from appropriate
engagement team members in fulfilling this responsibility. Engagement team members who assist the
engagement partner with audit planning also should comply with the relevant requirements in this standard.
Planning an Audit
04 The auditor should properly plan the audit. This standard describes the auditor's responsibilities for
properly planning the audit.
05 Planning the audit includes establishing the overall audit strategy for the engagement and developing an
audit plan, which includes, in particular, planned risk assessment procedures and planned responses to the risks
of material misstatement. Planning is not a discrete phase of an audit but, rather, a continual and iterative
process that might begin shortly after (or in connection with) the completion of the previous audit and continues
until the completion of the current audit.
Preliminary Engagement Activities

06 The auditor should perform the following activities at the beginning of the audit:
a. Perform procedures regarding the continuance of the client relationship and the specific audit
engagement,
b. Determine compliance with independence and ethics requirements, and
Note: The determination of compliance with independence and ethics requirements is not limited to
preliminary engagement activities and should be reevaluated with changes in circumstances.
c. Establish an understanding of the terms of the audit engagement with the audit committee in
accordance with AS 1301, Communications with Audit Committees.
Planning Activities
07 The nature and extent of planning activities that are necessary depend on the size and complexity of the
company, the auditor's previous experience with the company, and changes in circumstances that occur during
the audit. When developing the audit strategy and audit plan, as discussed in paragraphs .08-.10, the auditor
should evaluate whether the following matters are important to the company's financial statements and internal
control over financial reporting and, if so, how they will affect the auditor's procedures:
 Knowledge of the company's internal control over financial reporting obtained during other
engagements performed by the auditor;
 Matters affecting the industry in which the company operates, such as financial reporting practices,
economic conditions, laws and regulations, and technological changes;
 Matters relating to the company's business, including its organization, operating characteristics, and
capital structure;
 The extent of recent changes, if any, in the company, its operations, or its internal control over financial
reporting;
 The auditor's preliminary judgments about materiality, 5 risk, and, in integrated audits, other factors
relating to the determination of material weaknesses;
 Control deficiencies previously communicated to the audit committee 6 or management;
 Legal or regulatory matters of which the company is aware;
 The type and extent of available evidence related to the effectiveness of the company's internal control
over financial reporting;
 Preliminary judgments about the effectiveness of internal control over financial reporting;
 Public information about the company relevant to the evaluation of the likelihood of material financial
statement misstatements and the effectiveness of the company's internal control over financial
reporting;
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 Knowledge about risks related to the company evaluated as part of the auditor's client acceptance and
retention evaluation; and
 The relative complexity of the company's operations.
Note: Many smaller companies have less complex operations. Additionally, some larger, complex companies
may have less complex units or processes. Factors that might indicate less complex operations include: fewer
business lines; less complex business processes and financial reporting systems; more centralized accounting
functions; extensive involvement by senior management in the day-to-day activities of the business; and fewer
levels of management, each with a wide span of control.
Audit Strategy
08 The auditor should establish an overall audit strategy that sets the scope, timing, and direction of the
audit and guides the development of the audit plan.
09 In establishing the overall audit strategy, the auditor should take into account:
a. The reporting objectives of the engagement and the nature of the communications required by PCAOB
standards,
b. The factors that are significant in directing the activities of the engagement team,
c. The results of preliminary engagement activities and the auditor's evaluation of the important matters in
accordance with paragraph .07 of this standard, and
d. The nature, timing, and extent of resources necessary to perform the engagement.
Audit Plan
10 The auditor should develop and document an audit plan that includes a description of:
a. The planned nature, timing, and extent of the risk assessment procedures;
b. The planned nature, timing, and extent of tests of controls and substantive procedures; and
c. Other planned audit procedures required to be performed so that the engagement complies with
PCAOB standards.
Performing Risk Assessment Procedures
The auditor should perform risk assessment procedures that are sufficient to provide a reasonable basis for
identifying and assessing the risks of material misstatement, whether due to error or fraud, and designing
further audit procedures.
Risks of material misstatement can arise from a variety of sources, including external factors, such as
conditions in the company's industry and environment, and company-specific factors, such as the nature of the
company, its activities, and internal control over financial reporting. For example, external or company-specific
factors can affect the judgments involved in determining accounting estimates or create pressures to
manipulate the financial statements to achieve certain financial targets. Also, risks of material misstatement
may relate to, e.g., personnel who lack the necessary financial reporting competencies, information systems
that fail to accurately capture business transactions, or financial reporting processes that are not adequately
aligned with the requirements in the applicable financial reporting framework. Thus, the audit procedures that
are necessary to identify and appropriately assess the risks of material misstatement include consideration of
both external factors and company-specific factors. This standard discusses the following risk assessment
procedures:
a. Obtaining an understanding of the company and its environment (paragraphs .07-.17);
b. Obtaining an understanding of internal control over financial reporting (paragraphs .18-.40);
c. Considering information from the client acceptance and retention evaluation, audit planning activities,
past audits, and other engagements performed for the company (paragraphs .41-.45);
d. Performing analytical procedures (paragraphs .46-.48);
e. Conducting a discussion among engagement team members regarding the risks of material
misstatement (paragraphs .49-.53); and
f. Inquiring of the audit committee, management, and others within the company about the risks of
material misstatement (paragraphs .54-.58).
Note: This standard describes an approach to identifying and assessing risks of material misstatement that
begins at the financial statement level and with the auditor's overall understanding of the company and its
environment and works down to the significant accounts and disclosures and their relevant assertions.
In an integrated audit, the risks of material misstatement of the financial statements are the same for
both the audit of internal control over financial reporting and the audit of financial statements. The auditor's risk
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assessment procedures should apply to both the audit of internal control over financial reporting and the audit
of financial statements.
(Image 2: Audit Risk)
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(Image 3: Interrelationship of the Components of Audit Risk)
TRANSACTION CYCLES TEST OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS
TRANSACTION CYCLES the means through which an accounting system processes transactions of related activities
A. REVENUE & COLLECTION CYCLE
Activities involved: (1) Exchange of goods and services with customers; (2) collection of revenue in cash
Accounts affected: (1) Sales and related sales adjustments; (2) Cash in bank; (3) Accounts receivable and related allowances; (4)
Uncollectible accounts expense; and (5) Inventories
Documents used and Audit Significance
Documents Significance
Customers purchase order - Provides evidence that a customer actually ordered the goods.
- PO numbers are recorded on sales invoices to determine to which PO an
invoice relates.
Sales order - Contains the sellers understanding of the terms.
- Numerical sequence helps ensure that shipments are made for sale orders and
all sales are billed.
Bill of Lading (Shipping Documents) - Signature of carrier provides evidence that goods have been shipped.
- Numerical sequence helps ensure that all shipments are recorded as sales.
Credit memo - Provides evidence that the seller has reduced the amount billed to a customer.
- Numerical sequence helps ensure that CMs are recorded.
Remittance Advice - Indicates date and amount of payment and the invoices paid.
Uncollectible account authorization form - Numerical sequence helps ensure that all write offs are recorded.
Monthly statements - Reports the beginning balance and transactions that occurred during the period.
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Accounting records employed: (1) Sales journal; (2) Sales returns and allowances journal; (3) Cash receipts journal; (4) General
journal; (4) accounts receivable ledgers; and (5) Accounts receivable TB
I. TEST OF CONTROL OVER SALES TRANSACTION

(1) Inquiry, (2) Observation, and (3) Review
CONTROLS TEST OF CONTROLS
Assertion: EXISTENCE/OCCURRENCE, recorded sales are for shipments actually made to customers
Recording of sales is supported by customers PO, sales - Examines approved customer PO, sales order, shipping
orders are approved by the credit departments and documents and sales invoice.
approved and executed shipping documents  Contains required approval
 Terms and descriptions should be consistent
Independent personnel prepares and mails monthly - Observe whether these duties are segregated.
statement (follows up on complaints) and records accounts - Examine files on complaints received
receivable
Assertion: COMPLETENESS, all sales transactions that occurred are recorded

Prenumbered shipping documents are accounted to - Observe the procedure
determine that all sales invoice is prepared for all - Examine the invoice that bills the sale (sample)
shipments  A copy of sales invoice indicates that the shipment
was billed.
Prenumbered sales invoices are accounted to determine - Observe the recording process if the personnel accounts
that all sales are recorded for the numerical sequence
- Trace sales invoice to sales journal (sample)
Procedures are put in place to ensure timely recording of - Inquire how the procedures are followed.
sales and proper cut off are established - Observe if the procedures are followed.
- Inspect the report in the last shipment sent by the shipping
clerk to the billing clerk.
 Proper cut off provides evidence of existence.
Assertion: RIGHTS AND OBLIGATIONS, sales recorded represent only sales transactions
Clerk checks sales orders and sales invoices for terms - Observe whether such procedure is being performed
Assertion: VALUATION AND ALLOCATION, sales are correctly billed and recorded
(For goods shipped) Counted and descriptions on sales - Observe whether such procedure is being performed.
order are compared with the shipping document - Examine shipping orders for signature on the shipping
documents (sample)
Customer credit is approved by a responsible official prior - Examine sales order for credit approval prior to shipment
to shipment. (sample)
Sales invoices are checked to pricing, mathematical - Inquiry on the updating of price list.
accuracy and terms - Examine copies to determine that they contain signature
that they have been checked (sample)
AR subsidiary ledger is balanced to the general ledger - Observe whether such procedure is being performed.
control account regularly. - Foot the subsidiary ledger and compare to the balance of
the control account.
Assertion: PRESENTATION AND DISCLOSURE, sales and accounts receivable are recorded in accordance with PFRS
Sales must be properly classified - Determine whether the invoice copy contains approval
signature for account classification used.
II. SUBSTANTIVE TEST OF SALE TRANSACTIONS

ASSERTIONS AUDIT OBJECTIVES AUDIT PROCEDURES
a. Occurrence and Validity To determine that recorded sales are 1. Review sale journal, GL and accounts
b. Rights and Obligations authorized and are for shipments receivable masters file or TB.
actually made to real customers. 2. Trace sales journal entries to supporting
documents.
3. Trace shipping documents to entry of
shipments in perpetual inventory records.
4. Compare prices on sales invoice with
authorized price list or contracts.
c. Completeness To determine that existing sales 5. Trace shipping documents to sales invoices
transactions are recorded on a timely and entry to sales journal and AR master file.
basis. 6. Compare date sales are recorded and date on
shipping records (perform sales cutoff test)
d. Valuation or Allocation To determine that recorded sakes are 7. Recompute information on sales invoices.
for the amount of goods shipped and 8. Trace entries in sales journal to sale invoices.
are correctly billed and recorded. 9. Trace details on sales invoices to related
documents.
e. Presentation To determine that sales transactions 10. Examine document supporting sales
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are properly classified. transactions for proper classification.
III. TEST OF CONTROLS OVER SALE ADJUSTMENTS TRANSACTIONS

Cash Discounts substantive test of account balances
Sales returns, allowances, corrections emphasis is on testing the existence of recorded transactions as a means of uncovering
any diversion of cash from the collection that have been covered up by fictitious sales returns and allowances (existence);
understatement of these may lead to management reporting overstated net income (completeness)
Uncollectible Accounts most important audit objective is existence because of the possibility that the management may use this
account to cover up misappropriations of company assets. The control to prevent this is to employ proper authorization when writing
off uncollectible accounts
IV. SUBSTANTIVE TEST FOR SALES RETURNS AND ALLWOANCES

The same audit objectives with sales except for the following:
(1) Materiality if amount reflected in the CMs are immaterial, they can be ignored
(2) Emphasis on the objective emphasis is on testing the validity of recorded transactions as a means of uncovering
any diversion of collections that has been covered by a fictitious sales returns and allowances
Audit procedures normally include:

- Review of the use and authorization of CM; CMs must be serially numbered signed by an employee separate from the
handling of cash or maintenance of the customer s ledger
- Review of credits for returned merchandise supported by receiving report on the return shipment
- Verify prices, extensions and footings.
- Trace postings from sales returns journal and other accounting records to the customer s accounts in the SL
V. TEST OF CONTROLS OVER CASH RECEIPTS TRANSACTIONS

Assertion: EXISTENCE/OCCURRENCE, recorded receipts represent actual cash collections from customers
An employee prepares a prelisting of cash receipts - Observe whether a prelisting is prepared
- Inquire about the procedures followed by the employee
A validated receipt is obtained for deposits and compared - Compare the validated slips to the cash receipts summary
to cash receipts summary
Segregation of duties: handling cash and posting to AR - Observe the separation of duties
- Inquire from personnel about their responsibilities.
Preparation of a bank reconciliation by a person - Observe whether a bank reconciliation had been prepared
independent if cash, AR, or GL records by an independent employee
Assertion: COMPLETENESS, all receipts are processed and recorded

Prelisting and monitoring of cash register procedures - Observe the monitoring of this procedure
Checks are restrictively endorsed immediately after - Observe whether the procedure is followed.
receipts.
Preparation of daily cash summary and reconciliation of - Inquire from responsible employees about the regularity
OTC receipts and prelisting. and consistency of the performance of this procedure.
Reconciliation of cash receipts journal to the total posted to - Observe the procedures.
AR - Inquire from employees who perform the procedures.
Assertion: RIGHTS AND OBLIGATIONS, all cash receipts are deposited in the bank account of the client
Cash receipts are deposited intact daily in the companys - Observe whether the procedure is followed
bank account - Compare cash in the prelisting and validated deposit slip.
Assertion: VALUATION AND ALLOCATION, the DR to cash and CR to AR are valued at amount actually received
Cash receipts should be recorded at the amount indicated - Compare entries made in the cash receipts journal to
in the remittance advice remittance advices.
Assertion: PRESENTATION AND DISCLOSURE, cash receipts transactions are recorded in accordance with PFRS
An accounting supervisor approves classifications made in - Determine whether the accounting supervisor approval is
journalizing recorded.
VI. SUBSTANTIVE TESTS OF CASH RECEIPTS TRANSACTIONS

a. Existence or occurrence To determine that recorded cash 1. Trace cash receipts journal to prelisting of cash
receipts represent actual collection receipts and to remittance advice. (sample)
from customers. 2. Reconcile daily deposits to validated deposit
ticket. (from a sample of entries)
b. Completeness To determine that all cash and 3. Reconcile daily listings and validated deposit
checks are recorded. ticket to cash receipts journal to verify that all
cash receipts are recoded
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c. Valuation or Allocation To determine that debits to cash and 4. Examine remittance advice and verify that
credits to AR are values at amounts discount taken was appropriate (sample)
received. 5. Foot AR subsidiary ledger and reconcile with
GL account.
d. Presentation To determine that cash receipts 6. Review account coding in the cash receipts
transactions are presented and journal (sample).
disclosures are prepared in
accordance with PFRS.
B. EXPENDITURE AND DISBURSEMENT CYCLE

Activities involved: (1) Acquisition of goods and services; (2) payment for these acquisitions
Accounts affected: (1) Purchases and related adjustments, (2) Accounts payable and trade notes payable, (3) cash in bank, (4)
inventories, and (5) manufacturing and operating expenses
Purchase requisition - C Provides evidence that the purchasing department was authorized to initiate
purchase.
Purchase order - Contains signature of an employee who authorized purchase from a vendor.
Receiving report - F Provides evidence that goods were received.
Vendors invoice - B Provides evidence about a purchase of goods or services
Debit Memo - G Provides evidence that the amount owed to vendor has been reduced.
Voucher - D Provides documentation for recording of a transaction.
Check - A A canceled check provides evidence about payments that the entity has
made.
Vendors statement - E Used to determine that all transactions recorded on the statements have been
recorded in the books.
ACTIVITY 1: Match the following audit significance to the documents presented above.
a. A canceled check provides evidence about payments that the entity has made.
b. Provides evidence about a purchase of goods or services
c. Provides evidence that the purchasing department was authorized to initiate purchase.
d. Provides documentation for recording of a transaction.
e. Used to determine that all transactions recorded on the statements have been recorded in the books.
f. Provides evidence that goods were received.
g. Provides evidence that the amount owed to vendor has been reduced.
Accounting records employed: (1) Purchase journal; (2) Cash disbursement file/journal; and (3) Accounts payable master
file/subsidiary ledger
I. TEST OF CONTROLS FOR ACQUISITION

Assertion: EXISTENCE/OCCURRENCE, recorded acquisitions are for items that were acquired
Acquisitions approved by authorized personnel as - Examine the approval signature.
evidenced by signature on PO.
Preparation of voucher for the purchase of goods. - Observe the procedure.
- Examine file documents.
When vouchers are not prepared:
- Review entries in the purchase journal.
- Examine documents underlying them for authenticity and
reasonableness.
Check signer examine supporting documents and cancel - Examine cancellations on the documents.
the documents when paid.
Assertion: COMPLETENESS, all acquisitions that occurred recorded

1. Prenumbered receiving reports are used and accounted - D. Observe the procedure and account for the numerical
to determine that a liability is recorded. sequence of receiving report.
4. Vouchers are prenumbered and accounted ad they are - B. Observe the procedure and account for the numerical
entered in the voucher register. sequence of the voucher.
Assertion: RIGHTS AND OBLIGATIONS, recorded acquisitions are the entitys purchases and liabilities
5. Receiving reports are prepared by persons who have - C. Observe that the procedure is performed.
access to a blind copy of PO details.
Assertion: VALUATION AND ALLOCATION, acquisitions are recorded in the proper amounts.
3. Invoice amounts are verified by reference to the PO and - E. Examine the voucher for signature indicating
receiving report. Mathematical accuracy is also checked. performance.
Assertion: PRESENTATION AND DISCLOSURE, acquisitions are recorded in accordance with PFRS
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2. Employees are required to use a chart of accounts. - A. Examine the chart of accounts and signature of
Account coding is assigned to one person and checked by employee performing the verification.
another.
ACTIVITY 2: Identify the following controls as to what assertion they pertain and match the test of control to appropriate control.
1. Prenumbered receiving reports are used and accounted to a. Examine the chart of accounts and signature of
determine that a liability is recorded. employee performing the verification.
2. Employees are required to use a chart of accounts. Account b. Observe the procedure and account for the
coding is assigned to one person and checked by another. numerical sequence of the voucher.
3. Invoice amounts are verified by reference to the PO and c. Observe that the procedure is performed.
receiving report. Mathematical accuracy is also checked. d. Observe the procedure and account for the
4. Vouchers are prenumbered and accounted ad they are numerical sequence of receiving report.
entered in the voucher register. e. Examine the voucher for signature indicating
5. Receiving reports are prepared by persons who have access performance.
to a blind copy of PO details.
II. SUBSTANTIVE TESTS OVER ACQUISITION TRANSATION

a. Existence or occurrence To determine that recorded 1. Examine underlying documents for authenticity.
purchases are for items that were 2. Scan voucher register for large or unusual
acquired. items.
3. Inspect asset acquired.
4. Trace inventory purchased to perpetual
records.
5. Scan voucher register for duplicate payments.
b. Completeness To determine that purchases that 6. Trace a sequence of receiving reports to entries
occurred are recorded. in the voucher register.
7. Test cutoff.
8. Account for sequence of entries in voucher
register.
c. Rights and obligations To determine that purchases are the 9. Trace from invoices to perpetual inventory
entitys acquisitions and liabilities. records.
10. Examine vendors invoices.
d. Valuation or Allocation To determine that purchases are 11. Recompute the invoices and compare invoice
recorded for proper amounts. price to purchase order.
e. Presentation To determine purchases are 12. Check accuracy of accounts on invoices by
presented and disclosures are reference to chart of accounts
prepared in accordance with PFRS.
III. TEST OF CONTROLS OVER CASH DISBURSEMENT TRANSACTIONS

Assertion: EXISTENCE/OCCURRENCE, recorded cash disbursement occurred.
Authorized individual signs and mails promptly the checks. - Inquire/observe whether the procedure is followed.
A person independent to handling of disbursement reviews - Inquire whether the procedure is followed.
whether checks are processed on a timely basis. - Examine outstanding checks list.
Assertion: COMPLETENESS, all cash disbursements made are recorded

Checks are prenumbered and accounted for. - Observe whether employee who prepares the check
register accounts for the sequence of the checks.
Preparation of bank reconciliation by a person independent - Observe the procedure with emphasis on the segregation
of cash disbursements and cash receipts. of duties.
- Inspect reconciliation.
Assertion: RIGHTS AND OBLIGATIONS, all cash disbursements made are for obligations of the entity.
Examination of supporting documents before check signer, - Inquire about the segregation of duties.
who is independent of voucher preparation, signs check. - Observe whether separation really exists.
- Inquire about the check signers procedures for reviewing
documents.
Assertion: VALUATION AND ALLOCATION, amounts recorded are valued at proper amounts.
Verify amounts and calculations on vendors invoices. - Observe the procedure.
Employee signs voucher after this procedure. - Examine signature on paid invoices.
Assertion: PRESENTATION AND DISCLOSURE, cash disbursements are recorded in accordance with PFRS
Chart of accounts adequately describe the account to be - Observe the procedure.
used and account coding and checking is assigned to
different persons.
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IV. SUBSTANTIVE TESTS OVER CASH DISBURSEMENTS
a. Existence or occurrence To determine that recorded cash b. Examine paid checks for appropriate
disbursements occurred. endorsements.
e. Examine documents underlying payments.
b. Completeness To determine that all cash disbursements a. Reconcile cash disbursements per books
made are recorded. with cash disbursements per bank.
d. Test bank reconciliation.
c. Rights and obligations To determine that all cash disbursements e. Examine documents underlying payments
made were the entitys obligations.
d. Valuation or Allocation To determine that purchases are recorded f. Recalculate invoices paid.
for proper amounts.
e. Presentation To determine purchases are presented c. Check accuracy of accounts on invoices.
and disclosures are prepared in
accordance with PFRS.
ACTIVITY 3: Match the following audit procedures with the assertions and audit objectives presented above.
a. Reconcile cash disbursements per books with cash disbursements per bank.
b. Examine paid checks for appropriate endorsements.
c. Check accuracy of accounts on invoices.
d. Test bank reconciliation.
e. Examine documents underlying payments.
f. Recalculate invoices paid.
C. PAYROLL TRANSACTION
Activities involved: (1) acquisition of employee services; (2) compensation
Accounts affected: (1) Salaries Payable; (2) Cash in bank; and (3) Payroll expenses
Time Card - Provides evidence about the validity of the hours employee is paid for working.
Deduction authorization - Indicates that the employee authorized an amount to be withheld from a
paycheck.
Certification of Taxes withheld - Indicates that taxes withheld were reported to the various taxing authorities.
Labor ticket and labor ticket summary - Records specific activity of a laborer and the labor used in production on any
given day.
Payroll tax returns - Provides evidence that amount withheld are paid to the appropriate authorities.
Other personnel records - Numerical sequence helps ensure that all write offs are recorded.
Accounting records employed: (1) Payroll register; (2) Employee Earnings Record; (3) Labor Distribution journal; (4) and General
journal
I. TEST OF CONTROL OVER PAYROLL TRANSACTION

(2) Inquiry, (2) Observation, and (3) Review
Assertion: EXISTENCE/OCCURRENCE, recorded payroll transactions occurred
Personnel department authorizes the addition of an - Observe the procedures followed
employee to the payroll or any changes in employees - Examine written approvals for selected payrolls
status
Segregation of duties between the employee who reviews - Observe this procedure.
details of payroll and signs checks, and another for
distribution of checks
Requiring supervisor approval for hours entered in the time - Observe whether the procedure is followed.
cards
Assertion: COMPLETENESS, all payroll earned by employees is recorded

Prenumbered checks and accounted for in the bank - Observe whether the reconciliation is routinely prepared
reconciliation done by a personnel separate from the by a person independent of the payroll function.
payroll preparation
Assertion: RIGHTS AND OBLIGATIONS, recorded payroll transactions are for services received.
Employees are required to record the time work using a - Observe whether such procedure is being followed.
time clock - Examine signature on card.
Assertion: VALUATION AND ALLOCATION, payroll transactions recorded for proper amount.
Verification of accuracy of payroll calculations. - Examine payroll register for signature indicating
verification.
Control total of hours worked and verified independently of - Examine worksheet that documents the comparison.
payroll accounting and compared to hours for which
Page 20 of 58
payment is recorded
Assertion: PRESENTATION AND DISCLOSURE, payroll transactions are recorded in accordance with PFRS
Employees use chart of accounts in assigning codes for - Examine payroll summary for the signature indicating that
labor charges. Another employee would check work of the this procedure is being followed.
employees who assigned the codes.
II. SUBSTANTIVE TEST OF PAYROLL TRANSACTIONS

a. Existence or Occurrence To determine that recorded 1. Check the personnel records to determine whether
payroll transactions occurred. the employees are actually employed.
2. Observe actual payroll distribution.
3. Investigate the method of the company in handling
unclaimed pay.
b. Completeness To determine that all payroll 4. Trace payroll tested to summaries.
earned by employees is 5. Trace postings to summary totals to the GL and
recorded. subsidiary ledgers.
6. Check propriety of the accounting distribution.
c. Rights and obligations To determine that recorded 7. Examine the canceled employee payroll checks for
payroll transactions are for propriety.
services received. 8. Examine receipts signed by employees.
d. Valuation or Allocation To determine that payroll 9. Check the recorded pay against the original record for
transactions are recorded for hours worked or units produced.
the proper amounts. 10. Compare the rates paid with authorization
forms/contracts.
11. Check computations and deductions
e. Presentation To determine that payroll 12. Compare the total amount of payroll tested with
transactions are recorded in appropriate recorded disbursements from general
accordance with PFRS. bank account.
D. FINANCING AND INVESTING TRANSACTION CYCLES
Activities involved: (1) planning the cash need; (2) raising capital; and (3) investing funds
*cover the non operating activities of the company
Financing Transactions:
1. Borrowing from third parties excluding open trade accounts with creditors (short term and long term)
2. Share capital and dividend transactions share issuance and reacquisition, shares returned and dividend
declarations
*Authorizing, executing, and recording transaction
Investing Transactions:
1. Acquisitions and disposals of financial assets
2. Lending to third parties, other than open trade accounts with customers
Accounts affected:
(1) Notes Payable (non trade);
(2) Bonds Payable;
(3) Mortgage Payable
(4) Long term Liability (finance lease)
(5) Share capital
(6) Investment in securities
(7) Accounts Receivable (non trade)
(8) PPE and related adjustment
(9) Intangible assets
(10) Cash in Bank
(11) Interest Expense (Payable)
(12) Share premium
(13) Retained earnings
(14) Treasury Shares
(15) Dividends
(16) Capital Account
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Documents used in the expenditure cycle.
Share Certificate - Shows the number of shares owned by a shareholder.
Bond Certificate - Shows the number of binds owned by a bondholder
Bond Indenture - (contract) States the terms of the bond issue
Brokers Advice - Specifies the details of an investing transaction.
I. INTERNAL CONTROL OVER FINANCING TRANSACTION

*Three operative objectives: proper execution, recording and custody of assets
EXISTENCE OR OCCURRENCE & RIGHTS AND OBLIGATIONS: Financing cycle transactions actually occurred.
a. The BOD authorizes the issuance of long term notes, bonds, and share capitals, the legal
requirements and proceeds are promptly deposited intact.
b. Authorized (BOD or management) payments of interest and dividends to proper payees.
c. Authorized execution of redemption and reacquisition of bonds and share capital transactions.
d. Notes are cancelled when they are paid to avoid double payment.
e. Recorded balances are periodically verified with bondholders and shareholders
VALUATION/COMPLETENESS/CLASSIFICATION: Financing cycle transactions are properly valued and recorded.

a. Transactions and events are correctly recorded as to amount, classification, and accounting period.
b. Transactions are promptly and correctly posted to individual accounts.
II. TESTS OF CONTROL SUBSTANTIVE TESTS OF FINANCING CYCLE TRANSACTIONS

o Conduct test of compliance since transactions are few in volume but large in value; follow the
approach of substantiating the individual transactions
III. INTERNAL CONTROL OVER INVESTING TRANSACTION

*Audit risks are kept at a very low level because
- infrequent occurrence of the transactions
- effective control can be implemented at a little cost
*Three operative objectives: proper execution, recording and custody of assets
EXISTENCE OR OCCURRENCE & RIGHTS AND OBLIGATIONS: Investing cycle transactions actually occurred.
a. The management authorizes the acquisition/sale of PPE, securities and intangible assets.
b. Interest and dividends checks are promptly deposited intact.
c. Access to PPE, securities and intangible assets are restricted to authorized personnel.
d. Recorded balances are compared with existing assets at reasonable intervals.
VALUATION/COMPLETENESS/CLASSIFICATION: Investing cycle transactions are properly recorded.

c. Transactions and events are correctly recorded as to amount, classification, and accounting period.
d. Transactions are promptly and correctly posted to individual accounts investment.
IV. TESTS OF CONTROL SUBSTANTIVE TESTS OF FINANCING CYCLE TRANSACTIONS
22 | P a g e
o Test of control is limited because the number of transactions are relatively small.
o The auditor may decide to proceed directly to substantive tests of balances after a preliminary review of
the flow of transactions through the accounting system. (cost benefit relationship)
o When the entity has an extensive investment portfolio and numerous transactions, the auditor may
decide to complete his review of internal control and perform compliance tests on the controls.
Test of Control
1. Trace transactions for purchases and sales of PPE, securities and intangible assets through the system.
2. Review reports by internal auditor on their periodic inspections to PPE, securities and intangibles.
3. Review monthly reports by officer of client company on securities owned, purchased, and sold, and revenue
earned.
4. Review significant changes in the composition of PPE and related liens and mortgages.
Focus Questions
Thinking to Learning Thoroughly
Discuss your answers on the following questions briefly:

(If means of learning and teaching is done online, the following questions will be asked to students
during video conference or be posted by the teacher in the Google Class Stream/ Wall as a discussion
point.)
1. In your own understanding describe what an audit is.
2. Differentiate Inherent Risk, Control Risk and Detection Risk
Learning Activities
Enriching What Have You Learned
(In the Google Classroom, this will be given as a learning task. Video conferencing through Google Meet
Up (if possible) will be paused for 10 mins.to give students ample time to work on the task. Checking of
answers will be facilitated by the teacher during the video conference.)
1. Set the following phases in proper order:

a. Pre-engagement
b. Internal controls
c. Evidence-Gathering
d. Planning
e. Post-Audit Responsibilities
f. Reporting
Assessment
Testing
2. Explain
How Far
briefly
Havethe
You
difference
Learned between audit strategy, audit plan and audit program.
23 | P a g e
(In Google Classroom, this will be posted as a written task. There will be a deadline to be set for the
submission of answers)
Multiple-Choice. Select the best possible answer.

1. Acts to be performed in order to obtain audit evidence.
a. Audit standards c. Audit program
b. Audit procedures d. Audit strategy
2. Audit procedures performed to obtain an understanding of the entity and its environment, including
its internal control, and to assess the risks of material misstatements at the financial statement and
assertion levels.
a. Risk assessment procedures c. Substantive procedures
b. Test of control d. Analytical procedures
3. Audit procedures to test the operating effectiveness of controls in preventing or detecting and
correcting material misstatements at the assertion level.
4. Audit procedures to detect material misstatements at the assertion level.

5. An engagement letter is prepared with the interest(s) of _______

a. The auditor only
b. The Client only
c. The Public
d. Both the client and the auditor
6. Engagement letter that documents and confirms the auditor s acceptance of the engagement would
normally be sent to the client.
a. Before the commencement of the engagement
b. Before the auditor report is issued
c. After the audit report is issued
d. At the end of the fieldwork
7. It involves establishing the overall audit strategy for the engagement and developing an audit plan in
order to reduce the audit risk to an acceptably low level.
a. Reporting b. Planning c. Field work d. Organizing
8. Adequate planning of the audit work helps the auditor of accomplishing the following objectives,
except:
a. Ensuring that appropriate attention is devoted to important areas of the audit.
b. Identifying the areas that need a service of an expert.
c. Gathering of all corroborating audit evidence.
d. The audit work is completed efficiently.
24 | P a g e
9. Which of the following statement is/are correct?
Statement 1: The client should plan the audit work so that the audit will be performed in an
effective manner.
Statement 2: The auditor should develop and document an overall audit plan describing the scope
and conduct of the audit.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect
10. Which of the following activities should be performed by the auditor at the beginning of the current
audit engagement?
I. Perform procedures regarding the continuance of the client relationship and the specific
audit engagement.
II. Evaluate compliance with the requirements of the codes of ethics for professional
Accountants in the Philippines, including independence.
III. Establish an understanding of the terms of the engagement.
a. I and II
b. II and III
c. I and III
d. I,II and III
Reference:
Milan, Zeus Vernon B. (2018). Intermediate Accouting 1A. 2018 Edition Based on Philippine
Financial Reporting Standards. Bandolin Enterprise Publishing, Inc. Marcos Highway, Baguio Cit
25 | P a g e

And ACCOUNTANCY
1st Sem., S.Y.2020-2021

MODULE 2
Title: Audit of Cash
Name of Student:
Course/ year:
Class Schedule:
Date Submitted:
Module Overview:
In Module 2, you will read about the Audit of Cash. The topic covers the auditing procedures for
cash and preparation of bank reconciliation and proof of cash. For thorough learning, there are focus
questions provided for the students. These questions are basically relative to the insights students
gotten from reading the content of the module and its corresponding textbook reference. For
Abstraction or Generalization of instructional content, a brief lecture notes on Audit of Cash is provided
here followed by a learning activity where students will construct in good form a set of financial
statements.
Learning Outcomes
 Identify the categories of management assertions.
 Explain the substantive audit procedure for cash and cash equivalents.
 Identify what items are included as cash and cash equivalents
 Prepare bank reconciliation and proof of cash
LECTURE NOTES
Read this
Introduction
Cash is one of the most important assets of a business. Almost all the entity s transactions
ultimately result in either receipt or payment of cash. Cash usually includes cash in bank, cash on hand
and cash equivalents. Cash equivalents are short-term highly liquid investments that are both easily
convertible to known amount of cash. Examples of cash and cash equivalents include, but not limited to,
petty cash fund, payroll fund, money orders, cashier s checks, treasury bills and others.
Management Assertions
26 | P a g e
Management assertions are claims made by members of management regarding certain aspects
of a business. The concept is primarily used in regard to the audit of a company's financial statements,
where the auditors rely upon a variety of assertions regarding the business. The auditors test the validity
of these assertions by conducting a number of audit tests. Management assertions fall into the following
three classifications:
Transaction-level assertions. The following five items are classified as assertions related to transactions,
mostly in regard to the income statement:
 Accuracy. The assertion is that the full amounts of all transactions were recorded, without error.
 Classification. The assertion is that all transactions have been recorded within the correct
accounts in the general ledger.
 Completeness. The assertion is that all business events to which the company was subjected
were recorded.
 Cutoff. The assertion is that all transactions were recorded within the correct reporting period.
 Occurrence. The assertion is that recorded business transactions actually took place.
Account balance assertions. The following four items are classified as assertions related to the ending
balances in accounts, and so relate primarily to the balance sheet:
 Completeness. The assertion is that all reported asset, liability, and equity balances have been
fully reported.
 Existence. The assertion is that all account balances exist for assets, liabilities, and equity.
 Rights and obligations. The assertion is that the entity has the rights to the assets it owns and is
obligated under its reported liabilities.
 Valuation. The assertion is that all asset, liability, and equity balances have been recorded at
their proper valuations.
Presentation and disclosure assertions. The following five items are classified as assertions related to
the presentation of information within the financial statements, as well as the accompanying
disclosures:
 Accuracy. The assertion is that all information disclosed is in the correct amounts, and which
reflect their proper values.
 Completeness. The assertion is that all transactions that should be disclosed have been
disclosed.
 Occurrence. The assertion is that disclosed transactions have indeed occurred.
 Rights and obligations. The assertion is that disclosed rights and obligations actually relate to
the reporting entity.
 Understandability. The assertion is that the information included in the financial statements has
been appropriately presented and is clearly understandable.
There is a fair amount of duplication in the types of assertions across the three categories; however,
each assertion type is intended for a different aspect of the financial statements, with the first set
related to the income statement, the second set to the balance sheet, and the third set to the
accompanying disclosures.
If the auditor is unable to obtain a letter containing management assertions from the senior
management of a client, the auditor is unlikely to proceed with audit activities. One reason for not
27 | P a g e
proceeding with an audit is that the inability to obtain a management assertions letter could be an
indicator that management has engaged in fraud in producing the financial statements.
How to Audit
Cash?
In this module, we will take a look at the following:

 Primary cash assertions
 Cash walkthrough
 Directional risk for cash
 Primary risks for cash
 Common cash control deficiencies
 Risk of material misstatement for cash
 Substantive procedures for cash
 Common cash work papers
Primary Cash Assertions

The primary relevant cash assertions are:
 Existence
 Completeness
 Rights
 Accuracy
 Cutoff
Of these assertions, I believe existence, accuracy, and cutoff are most important. The audit client is
asserting that the cash balance exists, that it s accurate, and that only transactions within the period are
included. Classification is normally not a relevant assertion. Cash is almost always a current asset. But
when bank overdrafts occur, classification can be in play. The negative cash balance can be presented as
cash or as a payable depending on the circumstances.
Cash Walkthrough
28 | P a g e
As we perform walkthroughs of cash, we normally look for ways that cash might be overstated
(though it can also be understated as well). We are asking, What can go wrong? whether intentionally
or by mistake.
In performing cash walkthroughs, ask questions such as:

 Are timely bank reconciliations performed by competent personnel?
 Are all bank accounts reconciled?
 Are the bank reconciliations reviewed by a second person?
 Are all bank accounts on the general ledger?
 Are transactions appropriately cut off at period-end (with no subsequent period transactions
appearing in the current year)?
 Is there appropriate segregation between persons handling cash, recording cash, making
payments, and reconciling the bank statements
 What bank accounts were opened in the period?
 What bank accounts were closed in the period?
 Are there any restrictions on the bank accounts?
 What persons are on the bank signature cards?
 Who has the authority to open and/or close bank accounts?
 What is the nature of each bank account (e.g., payroll bank account)?
 Are there any cash equivalents (e.g., investments of less than three months)
 Were there any held checks (checks written but unreleased) at period-end?
As we ask questions, we also inspect documents (e.g., bank reconciliations) and make observations
(who is doing what?).
If controls weaknesses exist, we create audit procedures to address them. For example, if during the
walkthrough we review three monthly bank reconciliations and they all have obvious errors, we will
perform more substantive work to prove the year-end bank reconciliation. For example, we might
vouch every outstanding deposit and disbursement.
Directional Risk for Cash

What is directional risk? Its the potential bias that a client has regarding an account balance. A
client might desire an overstatement of assets and an understatement of liabilities since each makes the
balance sheet appear healthier. The directional risk for cash is overstatement. So, in performing your
audit procedures, perform procedures such as testing the bank reconciliation to ensure that cash is not
overstated.
Primary Risks for Cash

The primary risks are:
1. Cash is stolen
2. Cash is intentionally overstated to cover up theft
3. Not all cash accounts are on the general ledger
4. Cash is misstated due to errors in the bank reconciliation
5. Cash is misstated due to improper cutoff
Common Cash Control Deficiencies

In smaller entities, it is common to have the following control deficiencies:
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 One person receipts and/or disburses monies, records those transactions in the general ledger,
and reconciles the related bank accounts
 The person performing the bank reconciliation does not possess the skill to perform the duty
 Bank reconciliations are not timely performed
Risk of Material Misstatement for Cash

In my smaller audit engagements, I usually assess control risk at high for each assertion. If
control risk is assessed at less than high, then controls must be tested to support the lower risk
assessment. Assessing risks at high is usually more efficient than testing controls.
When control risk is assessed at high, inherent risk becomes the driver of the risk of material
misstatement (control risk X inherent risk = risk of material misstatement). For example, if control risk is
high and inherent risk is moderate, then my RMM is moderate.
The assertions that concern me the most are existence, accuracy, and cutoff. So my RMM for
these assertions is usually moderate to high.
My response to higher risk assessments is to perform certain substantive procedures: namely,
bank confirmations and testing of the bank reconciliations. As RMM increases I examine more of the
period-end bank reconciliations and more of the outstanding reconciling items. Also, I am more inclined
confirm the balances.
Substantive Procedures for Cash
My customary audit tests are as follows:

1. Confirm cash balances
2. Vouch reconciling items to the subsequent month s bank statement
3. Ask if all bank accounts are included on the general ledger
4. Inspect final deposits and disbursements for proper cutoff
The auditor should send confirmations directly to the bank. Some individuals create false bank
statements to cover up theft. Those same persons provide false confirmation addresses. Then the
confirmation is sent to an individual (the fraudster) rather than a bank. Once received, the
fraudster replies to the confirmation as though the bank is doing so. You can lessen the chance of
fraudulent confirmations by using Confirmation.com, a company that specializes in bank confirmations.
Alternatively, you might Google the confirmation address to verify its existence.
Agree the confirmed bank balance to the period-end bank reconciliation (e.g., December 31, 20X7).
Then, agree the reconciling items on the bank reconciliation to the bank statement subsequent to the
period-end. For example, examine the January 20X8 bank statement activity when clearing the
December 20X7 reconciling items. Finally, agree the reconciled balance to the general ledger cash
balance for the period-end (e.g., December 31, 20X7).
Cut-off bank statements (e.g., January 20, 20X8 bank statement) may be used to test the
outstanding items. Such statements, similar to bank confirmations, are mailed directly to the auditor.
Alternatively, the auditor might examine the reconciling items by viewing online bank statements.
(Read-only rights can be given to the auditor.)
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Cash and Cash Equivalents
DEFINITION OF CASH
Cash includes money and other negotiable instrument that is payable in money and acceptable
by the bank for deposit and immediate credit. It includes cash on hand, demand deposits and other
items that are unrestricted for use in the current operations.
1. Cash on Hand
 Customers checks awaiting deposit
 Undeposited cash collections (currencies such as bills and coins)
 Travelers check
 Cashiers/Official/Treasurers/Managers Checks
 Postal Money Orders (a demand credit instrument issued and payable by a post office)
 Bank Drafts ( a written order addressed to the bank to pay an amount of money to the order of
the maker)
2. Cash in Bank
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a. Demand deposit/commercial deposit/current account/checking account
- Generally non-interest bearing
- Withdrawable by checks against bank
b. Savings deposit (Saving Account)

- Generally non-interest bearing
- Depositor is issued an ATM card or passbook
- Withdrawable in ATM station or within the bank
3. Cash fund for current operations

-Change Fund
- Payroll Fund
- Purchasing Fund
- Revolving Fund (fund that is used for limited or specific purpose set by management)
- Interest fund
- Petty Cash Fund
- Dividend Fund
- Travel Fund
- Tax Fund
Fund for Noncurrent Operations

Fund for Noncurrent Operations should not be included as part of cash but as part of non-current assets.
Examples are as follows:
Account Generally noncurrent investment but

Pension Fund If related liability is current, then pension fund is current, thus part of
CASH.
Preferred redemption fund Noncurrent investment (unless the preferred share capital has a
mandatory redemption and the redemption is already within one-year
from the reporting period in which case this fund is reported as part of
current investment)
Acquisition of Property, plant Always noncurrent even if expected to be disbursed next year
and equipment
Contingent fund Noncurrent investment
Insurance fund Noncurrent investment
Sinking Fund If the related bonds payable is current, then sinking fund is current, thus
part of cash
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Focus Questions

(If means of learning and teaching is done online, the following questions will be asked to students
during video conference or be posted by the teacher in the Google Class Stream/ Wall as a discussion
point.)
1. Explain the financial statement presentation of cash and cash equivalents
2. Explain the three forms of Bank Reconciliation
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3. What is a proof of cash?
Learning Activities
(In the Google Classroom, this will be given as a learning task. Video conferencing through Google Meet
Up (if possible) will be paused for 10 mins.to give student s ample time to work on the task. Checking of
answers will be facilitated by the teacher during the video conference.)
Assertions
1. Which of the following is not a financial statement assertion relating to account balances?
a. Completeness b. Rights and Obligations
c. Existence d. Valuation and competence
2. The assertion of cut-off means that:

a. All transactions and events that should have been recorded
b. Amounts and other data relating to recorded transactions and events have been recorded
appropriately
c. Transactions and events have been recorded in the correct accounting period
d. Transactions and events have been recorded in the proper accounts.
3. The assertions of occurrence means that:

a. All transactions and events that should have been recorded are recorded
b. Amounts and other data relating to recorded transactions and events have been recorded
appropriately
c. Transactions and events that have been recorded have occurred, and pertain to the entity
d. Transactions and events have been recorded in the proper amount
4. Which of the following is not normally considered an act of concealing cash shortage?
a. Lapping b. Banking c. Window dressing d. Kiting
5. This document is a bank statement prepared a few days after month-end. Its purpose is to help
auditors verify reconciling items on the year end bank reconciliation.
a. Cut-off bank statement
b. Bank reconciliation
c. Bank transfer schedule
d. Proof of cash
Cash and Cash Equivalents Items
Problem 1
The following information has been extracted from the accounting records of the Lakers Corporation:
1. Cash on hand (undeposited sales receipt) P1,020

2. Certificate of deposit 25,000
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3. Customers note receivable 1,000
4. Reconciled balance in First Standard Bank Checking account (350)
5. Reconciled balance in Prime National Bank Checking account 9,350
6. Balance in Rural Bank savings account 8,560
7. Customers postdated check 1,350
8. Employee travel advances 1,600
9. Cash in bond sinking Fund 1,200
10. Bond sinking fund investments 8,090
11. Postage stamps 430
Required: Determine the balance in Lakers Cash account.
Problem 2
The following information is shown in the accounting records of SAPNO PUAS Company:
January 1 December 31
Cash P186,000
Accounts Receivable 201,000 273,000
Merchandise Inventory 258,000 234,000
Accounts Payable 159,000 144,000
Total sales and cost of goods sold for 2017 were P2,394,000 and P1,749,000, respectively. All sales and
purchases were made on credit. Various operating expenses of P321,000 were paid in cash. Assume that
there were no other pertinent transactions.
What is the cash balance on December 31, 2017?
Assessment
Testing How Far Have You Learned
(In Google Classroom, this will be posted as a written task. There will be a deadline to be set for the
submission of answers)
From the following information, prepare the following:
1. A four-column reconciliation that would end at adjusted balances.

a. Bank Method (5pts)
b. Book Method (5pts)
Reconciling items: November 30 December 31

Deposits in Transit P10,400 ?
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Outstanding Checks 16,014 ?
NSF checks 1,052 P1,400
Customers notes collected by bank 3,000 8554
Bank service charges 100 130
Erroneous bank debits 1,200 1,800
Erroneous bank credits 2,000 6,000
Book Balances ? 332,472

Bank Balances 261,120 ?
December transactions: Books Banks

Receipts P302,460 P299,902
Disbursements 222,846 220,196
Assignment
In your AE 15 Book Intermediate Accounting Part 1 kindly read the topics about accounting for petty
cash fund, bank reconciliation and proof of cash.
Reference:
Milan, Zeus Vernon B. (2018). Intermediate Accouting 1A. 2018 Edition Based on Philippine Financial
Assuncion, Ngina, Escala (2018). Applied Auditing, Real Excellence Publishing, Inc. Marcos Highway,
Baguio City
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And ACCOUNTANCY
1st Sem., S.Y.2020-2021

MODULE 3
Title: Audit of Receivables
Name of Student:
Course/ year:
Class Schedule:
Date Submitted:
Module Overview:
In Module 3, you will read about the process on how to audit receivables. The topic covers the steps in auditing
the different kinds of receivables including notes and loan receivables. For thorough learning, there are focus questions
provided for the students. These questions are basically relative to the insights students gotten from reading the content
of the module and its corresponding textbook reference. For Abstraction or Generalization of instructional content, a
brief lecture notes on Audit of Receivables is provided here followed by a learning activity where students will construct
in good form a set of financial statements.
Learning Outcomes

 Identify the audit objectives for receivables, sales and related accounts.
 Identify assertions addressed by audit procedures for receivable sales and related accounts.
 Explain the initial recognition, initial measurement, subsequent measurement, financial statement presentation
and derecognition of principles.
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LECTURE NOTES
Read this
Audit Objectives
When auditing accounts receivable and sales, the principal objective for the substantive tests is to determine the
following:
Assertion Category Audit Objectives

Existence or Occurrence All receivables on the statement of financial position are authentic claims of the entity
and all sales have really occurred and pertain to the entity.
Completeness All authentic claims of the entity for amounts receivable are included on the statement of
financial position and all sales have been included in the statement of comprehensive
income.
Cut-off Sales have been recorded in the proper accounting period.
Valuation and Allocation Receivables are carried at their net realizable (collectable value) (i.e., the gross
receivables are properly stated with appropriate allowances provided for doubtful
accounts, discounts, returns, warranties and similar items).
Accuracy Sales have been accurately recorded in the statement of comprehensive income.
Rights and Obligations The entity owns, or has a legal right to all the receivables on the statement of financial
position at the reporting date.
Presentation and Disclosure Receivable and sales are properly classified, described and disclosed in the financial
&Classification statements, including notes, in accordance with PFRS.
Pledged, discounted, or assigned accounts receivable are properly disclosed. Related

party receivables and sales are properly disclosed.
Audit Procedures for Receivable and Sales

The auditors primary substantive procedure for receivable balance and sales transactions will typically include the
following:
1. Reconciliation of Subsidiary-ledger with General Ledger;
2. Confirming receivables and reviewing subsequent cash receipts;
3. Analyzing notes receivable and related interest;
4. Evaluating the adequacy of the allowance for doubtful accounts, including the appropriateness of the methodology
used to calculate the allowance;
5. Performing accounts receivable and sales cutoff;
6. Checking the appropriate valuation of accounts receivable denominated in foreign currencies;
7. Investigating any transactions with or related party receivables;
8. Analyzing credit balances and unusual items;
9. Ascertaining whether any receivables have been pledged or assigned and
10. Performing analytical procedures.
Reconciliation of Subsidiary Ledger with General Ledger
First step in the audit of receivables is to obtain an aged trail balance of receivable. After obtaining an aged trial
balance, the auditor should test the clerical accuracy (e.g. footing, cross-footing) of the schedule and briefly inquire of
management as to steps taken to ensure the trial balance is complete, i.e., that all receivables due to the company are
included on the trial balance.
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The auditor then would obtain and review the reconciliation prepared by the entity between the receivables
sub-ledger and the control account (i.e., general ledger), and investigate reconciling items, particularly any unusual non-
standard journal entries.
Confirmation of Receivables & Review of Subsequent Cash Receipt
The primary audit procedure to verify the existence and gross valuation of receivable is through confirmation.
Note that confirmation should only be performed once the auditor has already reconciled the subsidiary ledger with the
general ledger. Ordinarily, confirmation is used unless:
1. Receivables are immaterial;

2. Confirming would not provide useful information and
3. Control risk is so low that other procedures will reduce audit risk to an acceptable level.
Positive Confirmation vs Negative Confirmation
Definition:
Confirmationthe auditors receipt of a direct written or electronic response from a third party verifying the accuracy of
information requested.
Confirmation procedures can be used to confirm the balance of receivable, payable, contingent liabilities, bank account,
inventories and securities in custody, or to confirm the transaction of sales invoice, side agreement, and purchases.
Objective:
The purpose of accounts / transactions confirmation is to meet the Existence, Accuracy, and Cutoff objectives.
Form of Confirmation: Positive and Negative
Positive Confirmation
A positive confirmation = correct or incorrect, the recipient is requested to reply/ confirm with the stated amount/
information. Included as positive confirmation are:
 A blank confirmation.
 An invoice confirmation.
 Sales involve special terms or side-agreements confirmation.
Negative Confirmation
A negative confirmation = the recipient is requested to reply only when the recipient disagrees with the stated amount.
Difference:
1. Failure to reply:
o Positive Confirmation
Auditor should perform follow up procedures if the debtor does not reply. See the follow procedures below.
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o
Negative Confirmation
Regarded as a correct response, even though the debtor may have ignored the confirmation request.
2. Cost of confirmation:
Negative Confirmation is less expensive than positive confirmation, because there will be no second
confirmation request and no follow-up procedures.
3. Criteria to Use:
For using Negative Confirmation, all of the following circumstances are present:
 The auditor has assessed the risk of material misstatement as low and has obtained sufficient evidence
regarding the design and operating effectiveness of controls.
 The population of items is made up of a large number of small, homogenous account balances, transactions, or
other items.
 The auditor expects a low exception rate.
 The auditor reasonably believes that recipients will give the requests adequate consideration. Adequate
consideration exist when there are high response rates on audits in previous year or of similar clients.
Typically, when negative confirmations are used, the auditor puts considerable emphasis on the effectiveness of internal
controls, substantive tests of transactions, and analytical procedures as evidence of the fairness of accounts receivable,
and assumes that the large majority of the recipients will provide a conscientious reading and response to the
confirmation request.
1. Common Practical Use

Negative Confirmation is common used practically for audits of hospitals, retail stores, banks, and other
industries in which the receivables are due from the general public.
ACCOUNTS RECEIVABLES
Trade vs. Non-trade receivables
• Trade receivables are receivables arising from the sale of goods or services in the ordinary course of business.
• Receivables arising from other sources are non-trade receivables.
Financial statement presentation
• Trade receivables are classified as current assets when they are expected to be realized in cash within the
normal operating cycle or one year, whichever is longer.
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• Non-trade receivables are classified as current assets only when they are expected to be realized in cash within
one year.
• Trade and non-trade receivables that are current assets are aggregated and presented in the statement of
financial position as Trade and other receivables.”
returns and allowance against accounts payable with credit

balance
Initial Measurement
• Trade receivables that do not have a significant financing component are measured at the transaction price in
accordance with PFRS 15 Revenue from Contracts with Customers.
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• Transaction price is the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties
(e.g., some sales taxes). (PFRS 15)
• As a practical expedient under PFRS 15, an entity may not discount a trade receivable if it is due within 1 year.
Recognition
• Trade receivable is recognized when the entity has right to consideration that is unconditional. This is normally
the case when the control over the promised goods or services is transferred to the customer.
FOB Shipping point vs. FOB Destination
• Under FOB shipping point, ownership is transferred to the buyer upon shipment. Therefore, sales and accounts
receivable are recognized on shipment date.
• Under FOB destination, ownership is transferred only upon receipt of the goods by the buyer. Therefore, sales
and accounts receivable are recognized only when the buyer receives delivery of the goods.
Allowance method of accounting for bad debts
• Journal entries
• T-account of the Allowance for doubtful accounts account.
• T-account of the Accounts receivable account.
Estimating doubtful accounts
1. Percentage of net credit sales method
2.
Percentage of ending
receivable
method
3. Aging method
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Summary Table for Freight
Freight Terms BUYER SELLER

FOB Freight Collect Reduction of A/P Reduction of A/R
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DESTINATION Freight Prepaid No Effect No Effect
FOB SHIPPING Freight Collect No Effect No Effect
POINT
Freight Prepaid Addition to A/P Addition to A/R
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NOTES RECEIVABLE
• Notes receivable is a claim supported by a formal promise to pay a certain sum of money at a specific future
date usually in the form of a promissory note.
Initial measurement
• Receivables are initially recognized at fair value plus transaction costs.
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Summary of Measurements
The fair value of the receivable at initial recognition may be measured in relation to the cash price equivalent of the
noncash asset given up in exchange for the receivable. In such case, the subsequent measurement of the receivable is at
amortized cost.
Time Value of Money
• FV of ₱1 vs. PV of ₱1
- The FV of ₱1 and PV of ₱1 are opposites.
- The FV of ₱1 answers the question “If I invest ₱100,000 today at 10% interest, how much money do I have in
three-year’ time?”
- FV of ₱1 = (1 + i)n = (1 + 10%)3 = 1.331
- Answer: (₱100,000 x 1.331 ) = ₱133,100
or (₱100,000 x 110% x 110% x 110%) = ₱133,100
- The PV of ₱1 answers the question “If I want to have ₱133,100 in three-years’ time, how much money do I have
to invest today (at 10% interest)?
- PV of ₱1 = (1 + i)-n = (1 + 10%)-3 = 0.751315
- Answer: (₱133,100 x 0.751315 ) = ₱100,000
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Loans receivable
• Receivables are initially recognized at fair value plus transaction costs.
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 Direct origination costs are added to the carrying amount of a loan receivable. Indirect origination costs are
expensed when incurred.
 Origination fees are deducted from the carrying amount of a loan receivable.
Impairment
The expected credit loss model (ECL)
Definition of terms
• Loss allowance is the allowance for expected credit losses on financial assets that are within the scope of the
impairment requirements of PFRS 9.
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• Expected credit losses is the weighted average of credit losses with the respective risks of a default occurring
as the weights.
• Credit loss is the difference between all contractual cash flows that are due to an entity in accordance with the
contract and all the cash flows that the entity expects to receive (i.e., all cash shortfalls), discounted at the
original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-
impaired financial assets).
• 12-month expected credit losses The portion of lifetime expected credit losses that represent the expected
credit losses that result from default events on a financial instrument that are possible within the 12 months
after the reporting date.
• Credit risk The risk that one party to a financial instrument will cause a financial loss for the other party by
failing to discharge an obligation.
• Lifetime expected credit losses – The expected credit losses that result from all possible default events over the
expected life of a financial instrument.
Simplified approach
• An entity shall always measure the loss allowance at amount equal to lifetime expected credit losses for its trade
receivables or contract assets that do not contain a significant financing component.
• Examples: Provision matrix and Single loss rate
Derecognition of receivables
• Financial assets are derecognized when:
a) the contractual rights to the cash flows from the financial asset expire; or
b) the financial assets are transferred and the transfer qualifies for derecognition.
• Derecognition (of a financial instrument) means the removal of a previously recognized financial asset or
financial liability from an entitys statement of financial position.
Evaluation of transfers of receivables
• If control over the receivable is:
a) Substantially transferred, the receivable is derecognized.
b) Substantially retained, the receivable is not derecognized but continued to be recognized. Any cash
received from the transfer is recognized as liability.
c) Partially transferred and partially retained, the portion transferred is derecognized while the portion
retained is continued to be recognized.
Offsetting of financial assets and financial liabilities
• A financial asset and a financial liability shall be offset and the net amount presented in the statement of
financial position only when both of the following conditions are met:
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a. The entity currently has a legally enforceable right to set off the recognized amounts; and
b. The entity intends either to settle on a net basis, or to realize the asset and settle the liability
simultaneously.
Receivable financing
1. Pledge (hypothecation)
2. Assignment
a. Notification basis
b. Non-notification basis
3. Factoring
4. Discounting of notes receivable
a. NP = MV D
b. MV = P + i
c. D = MV x Dr x Dp
d. Dr = Discount rate
e. Dp = Discount period (the unexpired term of the note)
f. Interest income = interest accrued on the expired term of the note
Focus Questions
(If means of learning and teaching is done online, the following questions will be asked to students during video
conference or be posted by the teacher in the Google Class Stream/ Wall as a discussion point.)
1. Explain the initial measurement and subsequent measurement of accounts receivable.
2. Explain the two methods of recording accounts receivable and credit sales.
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3. Explain the initial measurement of short-term notes receivables.
4. Explain the initial and subsequent measurement of long-term notes receivables.
5. Enumerate and explain the four common forms of receivable financing.
Learning Activities
(In the Google Classroom, this will be given as a learning task. Video conferencing through Google Meet Up (if possible)
will be paused for 10 mins.to give student s ample time to work on the task. Checking of answers will be facilitated by the
teacher during the video conference.)
Substantive Test of Receivable and Sales
1. What is the primary assertion being addressed by confirmation of receivables?

a. Completeness
b. Existence
c. Gross Valuation
d. Accuracy
2. Of the two forms of confirmation request, which is considered more reliable source of evidence?
a. Positive confirmation
b. Negative confirmation
c. Both are equally reliable
d. None of the two is considered more reliable
3. To test the existence assertion for recorded receivables, an auditor would select a sample from the.
a. Sales orders file

b. Customer purchase orders
c. Accounts Receivable subsidiary ledger
d. Shipping documents (bills of lading) file.
4. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the
subsequent year provide assurance about management s assertion of
a. Presentation b. Rights c. Completeness d. Existence
5. Which of the following procedures is least likely to help auditors to assess the adequacy of management s accounting
estimate of the allowance for doubtful accounts?
a. Investigate confirmation exceptions for indication of amounts in dispute.

b. Review accounts which have been written off as uncollectible prior to year-end.
c. Investigate credit ratings for large accounts receivable.
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d. Discuss with the credit manager the current status of doubtful accounts.
THEORETICAL QUESTIONS
TRUE OR FALSE
1. Accounts receivable are to be reported at their net realizable value.
2. The direct write-off method for uncollectible accounts does not provide for the matching of current revenues
with related expenses.
3. The use of the direct write-off method is acceptable under generally accepted accounting principles.
4. Doubtful accounts expense is normally reported as a deduction from sales in the income statement.
5. The entry to write off an uncollectible account under the allowance method is a debit to Doubtful Accounts
Expense and a credit to Accounts Receivable.
6. The method of estimating uncollectible accounts expense based on the accounts receivable balance emphasizes
the determination of the net realizable value of the receivables.
7. When estimating collectability based on an analysis of the accounts receivable balance, any existing balance in
the allowance for doubtful accounts is ignored.
8. The aging method of estimating doubtful accounts is a variation of the percentage of ending receivables method.
9. The "list" sales price less any trade discount is the invoice amount.
10. Sales discounts are normally reported as selling expenses.
Assessment
Testing How Far Have You Learned
Multiple-Choice
1.Present value is
a. the value now of a future amount.
b. the amount that must be invested now to produce a known future value.
c. always smaller than the future value.
d. all of these.
2.Which of the following factors would show the largest value for an interest rate of 12% for six periods?
a. Present value of 1
b. Present value of an ordinary annuity of 1
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c. Present value of an annuity due of 1
d. Answer cannot be determined
3.What factor should you use if you want to determine the value now of a ₱1,000 payment due in three years’ time?
a. Future value of 1
b. Present value of 1
c. Present value of an ordinary annuity of 1
d. Present value of an annuity due of 1
4.What factor should you use for a ₱1,000 note receivable that is collectible in five annual installments of ₱200
starting one year hence?
d. Any of these
5.What factor should you use for a ₱2,000 note receivable that is collectible in full after five years?
d. Any of these
6.Which of the following results to the smallest value?

a. Present value of an annuity due of 1 @12%, n=5
b. Present value of an ordinary annuity of 1 @12%, n=5
c. Present value of 1 @12%, n=5
d. Present value of 1 @14%, n=5
7.A higher interest rate results to

a. increased amount of present value.
b. decreased amount of present value.
c. same amount of present value.
d. Answer cannot be determined due to insufficient data
8.A shorter period results to

a. increased amount of present value.
b. decreased amount of present value.
c. same amount of present value.
d. shorter accountant.
9.The present value of 1 for a period of zero equals

a. 1.
b. 0.
c. Error!
d. Answer depends on the interest rate
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10.Multiplying a lump sum future amount by a Present Value of 1 factor results to
a. Future amount.
b. Future value of 1.
c. Present value.
d. Present value of 1.
11. A 180-day, 12 percent interest-bearing note receivable is sold to a bank after being held for 45 days. The
proceeds are calculated using a 15 percent interest rate. The note receivable has been
Discounted Pledged
a. Yes Yes
b. Yes No
c. No Yes
d. No No
12. A 90-day, 15 percent interest-bearing note receivable was immediately discounted at a bank at 12 percent. The
proceeds received from the bank upon discounting would be the
a. maturity value less the discount at 15 percent.
b. maturity value less the discount at 12 percent.
c. face value less the discount at 15 percent.
d. face value less the discount at 12 percent.
13. The balance in Accounts Receivable is not reduced in recording which of the following types of financing
arrangements?
a. Assignment of specific accounts receivable
b. General assignment (pledge) of accounts receivable
c. Factoring of accounts receivable
d. Transfer of accounts receivable without recourse
14. When the accounts receivable of a company are sold outright to a company that normally buys accounts
receivable of other companies without recourse, the accounts receivable have been
a. transferred with recourse.
b. factored.
c. assigned.
d. pledged.
15. Which of the following is most likely not a condition before a transfer of receivables is accounted for as a sale?
a. The transferred assets have been isolated from the transferor.
b. The transferor's obligation under the recourse provisions can be reasonably estimated.
c. The transferee has the right to pledge or exchange the transferred assets.
d. The transferor does not maintain effective control over the assets through an agreement to repurchase the
assets before their maturity.
Assignment
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In your AE 15 Book Intermediate Accounting Part 1 (Milan or Valix) kindly read the topics about Accounts
Receivable, Notes Receivable, Loans Receivable and Receivable Financing. This will help you in order to solve the
additional activity and quizzes that will be uploaded in the google classroom.
Reference:
Milan, Zeus Vernon B. (2018). Intermediate Accouting 1A. 2018 Edition Based on Philippine Financial
Assuncion, Ngina, Escala (2018). Applied Auditing, Real Excellence Publishing, Inc. Marcos Highway,
Baguio City
Valix, Conrado T. (2019). Financial Accounting and Reporting Part 1 2019 Edition. GIC Enterprises Inc.
Claro M. Recto Manila
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Course / Learning Packet in (Pre 2) : Auditing & Assurance Concepts & Application 1

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Course / Learning Packet in (Pre 2) : Auditing & Assurance Concepts & Application 1

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COURSE / LEARNING PACKET IN

Auditing & Assurance Concepts & Application 1

REXMAR CHRISTIAN L. BERNARDO

VISION r MABINI COLLEGES aims to provide quality instruction, research

Contents Page No.

Week 3-5 Module 2: Audit of Cash

Activity 1: Identify assertions addressed by audit procedures for inventories,

Activity 1: Identify assertions addressed by audit procedures for property, plant

Activity 1: Identify assertions addressed by audit procedures for investments and

MABINI COLLEGES aims to provide quality instruction, research

shall cultivate a CULTURE Daet, Camarines -

Time Frame Course Content

Conducting Orientation on the Subject

Lesson1: Audit Process and Pre-engagement

Evaluating the submitted outputs of the students

Module2: Audit of Cash  Accomplished seat works and quizzes

Learning Modalities (depending on the needs of every student)

Module 3: Audit of Receivables

Lesson 1: Substantive Test of Inventories and

Evaluating students outputs

Learning Modalities (depending on the needs of every student)

Module 5: Audit of Property Plant and

Module 6: Audit of Investment (Equity Securities

Module 7: Audit of Intangible Assets

M-S 2:30- 4:00 PM

MABINI COLLEGES, INC.

COLLEGE OF BUSINESS ADMINISTRATION

PrE 2  Auditing & Assurance Concepts & Application 1

Primary Objective: To minimize the likelihood of being associated to a client whose

Primary Objective: To establish a basis for reliance on internal controls, in determining

This phase will always be performed by the auditor.

Primary Objective: To ascertain the degree of correspondence between the financial

Primary Objective: To assist the auditor in assessing conclusion reached is consistent

Primary Objective: To communicate the conclusions reached by the auditor to various

(Image 1: Acceptance of Pre-Engagement)

Contents of engagement letter (RA FORMS)  Acronym

Acceptance of a Change in Engagement

a. Stop performing the old engagement

a. Continue the original audit engagement

Note: Every time withdrawal is made, the auditor

Circumstances that could lead to Change in Engagement

AUDIT PLANNING (PSA 300)

Responsibility of the Engagement Partner for Planning

Preliminary Engagement Activities

b. Determine compliance with independence and ethics requirements, and

Performing Risk Assessment Procedures

(Image 2: Audit Risk)

TRANSACTION CYCLES  TEST OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS

I. TEST OF CONTROL OVER SALES TRANSACTION

Assertion: COMPLETENESS, all sales transactions that occurred are recorded

II. SUBSTANTIVE TEST OF SALE TRANSACTIONS

III. TEST OF CONTROLS OVER SALE ADJUSTMENTS TRANSACTIONS

IV. SUBSTANTIVE TEST FOR SALES RETURNS AND ALLWOANCES

Audit procedures normally include:

V. TEST OF CONTROLS OVER CASH RECEIPTS TRANSACTIONS

Assertion: COMPLETENESS, all receipts are processed and recorded

VI. SUBSTANTIVE TESTS OF CASH RECEIPTS TRANSACTIONS

B. EXPENDITURE AND DISBURSEMENT CYCLE

I. TEST OF CONTROLS FOR ACQUISITION

Assertion: COMPLETENESS, all acquisitions that occurred recorded

II. SUBSTANTIVE TESTS OVER ACQUISITION TRANSATION

III. TEST OF CONTROLS OVER CASH DISBURSEMENT TRANSACTIONS

Assertion: COMPLETENESS, all cash disbursements made are recorded

Module2: Audit of Cash Accomplished seat works and quizzes

Evaluating students outputs

PrE 2 Auditing & Assurance Concepts & Application 1

Contents of engagement letter (RA FORMS) Acronym

TRANSACTION CYCLES TEST OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS

PrE 2 Auditing & Assurance Concepts & Application 1

1. Explain the financial statement presentation of cash and cash equivalents

PrE 2 Auditing & Assurance Concepts & Application 1

• T-account of the Allowance for doubtful accounts account.

• T-account of the Accounts receivable account.