Method

1. Excel Outline
2. Practice Questions
3. Index Card Summary

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FAR Problem 10
Reliance Approach
Rely on internal control
IRxCR ↓ (low) risk
 Responsibility of sales and
purchases cut-off
Client's responsibility (INTERNAL
CONTROL)

Record to Report → inherent in the

first five business processes in the old
syllabus

Audit cases for Debt Equities and

Securities → in Investment Properties
and Other investments (FARAP-06C)

GP Test
Analytical Procedure (when risk is
low)
CASH AND CASH EQUIVALENTS

01. CONCEPT RECALL: CCE FS PRESENTATION & COMPOSITION

02. CONCEPT RECALL: CASH COUNT

03. PETTY CASH FUND

04. BANK RECONCILIATION

05. PROOF OF CASH

06. FAR Theory MCQ

07. Auditing Practice

08. Business Process Overview

09. Substantive Testing

09. Substantive Testing

10. BANK RECON: VALIDATION AUDIT PROCEDURES

 01. CONCEPT RECALL: CCE FS PRESENTATION & COMPOSITION

Cash
→ current asset
→ miimum line item (presented at no
less than face)

If collection goes through employees, Cash on hand under Imprest System

how to ensure that the deposits are Petty Cash Fund
collected intact? What internal control?

1. Require customers to pay through

bank
2. Require customers to pay through
checks
All disbursements should be made Disbursement check UNRELEASED
through checks, even petty cash and POST-DATED
transactions adj. to AP if recorded (since it shoudln't
be recorded)
CIB (silent) → assumed as CCE do not adj. (it should not be recorded)

Clsoed bank → ceases to be cash

altogether (bank closed, therefore NSF Check
recevable by the amount recoverable book reconciling item (unrecorded debit
from PDIC) already adjusted by the bank but not yet
in the books)
Stale checks
Outstanding for more than six months
(outstanding checks)

Undeposited collections →
bank reconciling item
POSITION FAR Problem 1

Internal control for cash loss due to

theft
→ IMPREST SYSTEM

Number 1 requirement of the imprest

system
→ deposit to third parties (BANK)

under Imprest System

d About traveler's checks: CCE because the funds are
secured for EASY/instant
access
secured/instant access →
practically as good as cash

About Manager's checks: a secured fund/check

(CCE)
 Customer check NSF and POST-
t check UNRELEASED
DATED
TED
adj. to receivables if already recorded
orded (since it shoudln't
(since it should not be a cash item)
ignore if not yet recorded as cash item
hould not be recorded)
(since it should not be a cash item)

g item (unrecorded debit

d by the bank but not yet
Only investments in debt
securities among the other
securities can qualify as cash
equivalent
Debt: has a maturity date
Exception:
investments in equity securities that are
redeemable within 3 months from acquisition
qualify as debt security and CCE
 paying dividends = current FAR Problem 2
purpose :O

Cash in savings deposit postage stamps: already used

CCE by default (for expenses)
savings = in the bank (CIB)

CCE because the funds are About Bank Drafts:a secured fund/check (CCE)
secured for EASY/instant → similar to Manager's Checks
access
secured/instant access →
practically as good as cash Checks that are NOT expenses /
replenishment: (TMP)
Traveler's Checks
Manager's Checks
Postal Money Orders

Bank overdraft → negative bank

balance (CURRENT LIABILITY)

Postal Money Orders → secured fund (as

good as cash)
Difference between postal money order and
a secured fund/check manager's check and bank draft:
(CCE) Amounts are in denominations (1 or 5
hundedths, thousandths, etc.)
Difference between postal money order and
manager's check and bank draft:
Amounts are in denominations (1 or 5
hundedths, thousandths, etc.)
FAR Problem 2
FAR Problem 3

Postal Money Orders → secured fund (as Employee check in PCF

good as cash) Check in PCF except replenishment =
accomodated check (receivable)
If given: currencies and coins = 29,000
then PCF should be 29,000 (1K shortage)
 02. CONCEPT RECALL: CASH COUNT

Postage Stamp (prepaid expense)

enishment = not an accepted valid support
eivable) valid support for postage stamp =
DISBURSEMENT VOUCHER

Valid support for cash (SOP-Wise): CRD

SOP → Standard Operating Procedures

Not part of SOP but are valid supports:

Accommodated checks (cash and non-cash
item)
Employee IOUs

Note: Non-cash accommodated

checks = receivable
 FAR Problem 4

aid expense) Note: ALL CHECKS in PCF = Accomodated Check

support except for REPLENISHMENT CHECK
age stamp =
OUCHER Accommodated checks = receivable

(SOP-Wise): CRD IOUs = receivable (not PCF)

rating Procedures
Employee checks = receivable;
of PCF if date is already valid

Check float → time lag between

processing and clearing of the ch

re valid supports:
s (cash and non-cash

commodated
e
FAR Problem 4

IOUs = receivable (not PCF) Cash set aside for non-current and
non-operating investments = not CCE
Employee checks = receivable; part regardless of date of disburement
of PCF if date is already valid
Cash Surrender Value (CSV) = always
Check float → time lag between long-term investment
processing and clearing of the check.
03. PETTY CASH FUND

NOTE: PCF replenishment

only compare the imprest balance to the
cash on hand (COH). regardless whether imprest or fluctuating
Ignore expenses because there could be
shortages (debit) or overages (credit)
NOTE: PCF replenishment
only compare the imprest balance to the
cash on hand (COH). regardless whether imprest or fluctuating
Ignore expenses because there could be
shortages (debit) or overages (credit) Purpose of year-end AJE for PCF:
to let the PCF account equal to the COH as
of BS date
Ex:
Imprest bal. = 5K Year-end AJE (Fluctuating System)
Exp. vouchers = 2K AJE only when there is a shortage/overage since
COH = 1K PCF account = COH at all times
Replenishment = 4K (2K shortage) PCF account is adjusted to each expense unlike
imprest system.
 FAR Problem 5

st or fluctuating
st or fluctuating

JE for PCF:
ual to the COH as

ing System)
hortage/overage since
times
o each expense unlike
FAR Problem 6

Amount to replenish: 500

replenish: 500
 04. BANK RECONCILIATION

3 ways of preparing bank reconciliation: [ADJ. BAL. METHOD]

Correct cash balance = adj. bal. per bank
Single-date BR Per bank equation
2-Date BR → correct CASH bal.
4-Column POC Per book equation
→ Adj. bal. per book (may have short or
3 ways of preparing a single-date BR:
overage)
Bank → Book
Basis for shortage or overage
Book → Bank
→ adj. book bal. (per book under adj. bal.
Adj. bal. method
method)
Only in the adj. bal. method → compare the correct cash bal. (per bank) with
you can identify the CORRECT CIB bal. using the adj. bal. per book.
the PER BANK equation
Guide on shortage or overage [ADJ. BAL.
Deposit-in-Transit (DIT) METHOD]
DIT's in the current month should be one of the check on the correct cash balance (per
first items credited to the bank in the bank) and compare if it is less than the
FOLLOWING MONTH correct cash bal. per book (SHORTAGE) or if
the correct cash bal. is more than the cash
Outstanding Checks (OC) bal. per book (OVERAGE)
Bank reconciling item yet to be debited
(deducted) in the bank bal.
Outstanding only if within six months active.
Stale if more than six months.
Stale checks → BOOK reconciling item
Certified checks = NO LONGER OUTSTANDING
 the correct cash bal. is more than the cash
Outstanding Checks (OC) bal. per book (OVERAGE)
Bank reconciling item yet to be debited
(deducted) in the bank bal.
Outstanding only if within six months active.
Stale if more than six months.
Stale checks → BOOK reconciling item
Certified checks = NO LONGER OUTSTANDING
ash balance = adj. bal. per bank

ADJ. BAL.

ce (per
han the
RTAGE) or if
an the cash
an the cash
FAR Problem 7
FAR Problem 8

Assuming there is
Shortage: Correct
bal. by 5K
Adj. book bal. = 19
Unadj. book bal. =
FAR Problem 8

Assuming there is a shortage of 5K

Shortage: Correct cash bal. (bank) is less than adj, book
bal. by 5K
Adj. book bal. = 190,500
Unadj. book bal. = 197,500
FAR Problem 9

Net Adj. to Cash bal.

Compute unadj. cash bal. vs. correct cash bal. (per bank)
Compute net adj. through each item
Regarding FAR Problem 9
If there is a shortage or overage, only compare the correct
cash bal. (PER BANK) vs. UNADJUSTED cash bal.

Bank to book
Compute bank reconciling items as is, then reverse book
reconciling item proedures
Book to bank
Compute book reconciling items as is, then reverse bank
reconciling item proedures
 05. PROOF OF CASH

POC Rule 1 (BANK):

only compare the correct
USTED cash bal.

as is, then reverse book

as is, then reverse bank

(Bank)
Prior month = deduct; current month = add
prior month = deduct because it was recognized la
month in the books, but now only recorded in the

POC Rule 1 (BOOK):

 Rule 2 NOTES (Ban
Prior month error?
Current month err
Corrected already?
Not yet corrected?

"Treated as norma
Prior error to add
Prior error to dedu

uct; current month = add

uct because it was recognized last
s, but now only recorded in the bank.
Rule 2 NOTES (Bank/Book errors:
Prior month error?
Current month error?
Corrected already?
Not yet corrected?

Step 1:
A: Prior month error corrected in current month First column affeted (add or deduct)
Step 2: Always deduct (either rec. or disb.)
"Treated as normal reconciling item" If add 1st column cash, adj. receipts (deduct receipt
Prior error to add in prior month = deduct (in receipts) If deduct 1st column cash, adj. to disb. (deduct
Prior error to deduct in prior month = deduct (in disbursements) disbursements)

Follows the rule: prior month = deduct in current

month (receipts or disbursements)
 B: Prior month error not corrected in current
month
Step 1:
1st column add = 4th column add
Note: 2nd column deduct = 4th column d
prior month error not yet corrected in current no effect on rec. or disb.
month = typically book reconiling item = no effect
deduct) on rec. and/or disb.
Banks are assumed to automatically correct prior
ther rec. or disb.) month errors in the current month
receipts (deduct receipts)
dj. to disb. (deduct
Prior month error not yet corrected in current
month
Neither debited nor credited; no adjuting entry made
No effect on receipts or disbursements
 C: Current month error not corrected in
current month
ep 1:
t column add = 4th column add
d column deduct = 4th column deduct
effect on rec. or disb. Step 1
Normal recon item in the 4th column
Step 2
If error is in receipts, then adjust to receipts
If error is in disb., then adj. to disb.
orrected in D: Current month error co
current month
Notes:
Not corrected in current month = adj. 4th
column
Determine the source of the error (either rec. or
column Step 1
disb.)
Determine whether it is an ov
adjust to receipts error
to disb. Step 2
Overstatement error = adju
Understatement error = no
D: Current month error corrected in Overstated receipt
current month Deduct receipts (will deduct to cash)
Deduct disbursements (will add to cash)
→ current error corrected in current month means there
should be no effect on cash
Step 1 Overstated disbursement
Determine whether it is an overstatement or understatement Deduct disb. (will add to cash)
error Deduct receipts (will deduct to cash)
Step 2 → current error corrected in current month means there
Overstatement error = adjust to both rec. & disb. should be no effect on cash
Understatement error = no adjustment in POC
 FAR Problem 10

)
th means there Credit memo
credited in bank (add
book

nth means there

 Bank adj. cash balance = book adjusted
cash bal. assuming there is no shortage
or overage
Credit memo
credited in bank (added) but not yet in
book
FAR Problem 10

credit memo for bank loan =

recon item

IMPORTANT NOTE:
Banks always have DIT and OC for
current month
The problem lacks DIT and OC for c
so bank data is incomplete. Refer to
answers instead of per bank statem
redit memo for bank loan = bank bank credit = receipt (add)
econ item book debit = receipt (add)

bank debit = disb. (deduct)

book credit = disb. (deduct)

PORTANT NOTE:
ks always have DIT and OC for prior and
ent month
problem lacks DIT and OC for current month,
ank data is incomplete. Refer to book for
wers instead of per bank statement.
06. FAR Theory MCQ
No. 6
rule of disbursements by check = imprest
system
d = true if under fluctuating system
No. 1
equity securities have no maturity date (it
is not a debt security)
No. 3
a & c should state whether acquired 3
months prior to maturity
No. 13
Checks are always disbursements unless
they are PCF replenishments.
Understated disb. = need to deduct more
to cash.
No. 15
d is the answer if interest is stated as
"paid by the bank on the depositor's
behalf"
07. Auditing Practice
Inherent risk Test of Controls (ToC)
about the understanding of the business Performed when RMM is low.
and industry
Substantive Testing
RMM
Less extensive: single-date bank recon
Design and Operations
More extensive: proof of cash

Low RMM (IRxCR) = allowable high

DR Reliance Approach
relies on internal controls (low RMM)
High RMM (IRxCR) = leans towards ToC is conducted
low DR as much as possible No reliance approach
No Toc
Internal controls are highly risky
There are only 2 specific ST procedures
Analytical Procedures
→ applicable when less persuasive
→ applicable when less extensive
Test of Details
Account balances under Routinary
Business Processes

Required to undergo TOC before substentive

procedures
 rols (ToC)
hen RMM is low.
e Testing
ive: single-date bank recon
sive: proof of cash

pproach
rnal controls (low RMM)
cted
approach

rols are highly risky

y 2 specific ST procedures
rocedures
when less persuasive
when less extensive
ails
ore substentive
Non-routinary = few transactions
Few transactions = high internal control
risk
Routinary = few transactions
Many transactions = low internal control
risk
08. Business Process Overview
Question 1
Prenumbering = ensures
completeness

Bank lockbox system

cash from customers directly sent to the
bank through a depository box
Question 2

Restrictively endorsing a check:

employee writes the account number at the back o
check (account no. to which the check will be dep

Segragation of Duties to the ff. functions:

Authorization function
→ for Management
Custodial function (depending on the asset)
→ cash = Treasury Department
Recording function
→ for Accounting function
Monitoring Function (effectiveness and efficienc
controls are in place)
→ has no access to cash or records
→ Board of Directors
 Decentralization
More people involv
possibility of cash

dorsing a check: Internal Audit

he account number at the back of the Department that reports to the Board of
. to which the check will be deposited) Directors
Reconciles and reports to the BoD

Reconciling records
Duties to the ff. functions: Duty of the monitoring function
nction
t
on (depending on the asset)
y Department
ion
function
tion (effectiveness and efficiency of
ce)
o cash or records
ctors
 Question 3

Decentralization
More people involved = higher
possibility of cash loss

Question 4
Stamping of restrictive endorsement
should be done by the personnel who receives the
check FIRST (collection) and not by the AR
Cash Receipts Process

Question 5
 Question 6

item b: should use PCF instea

undeposited collections

Receives the check first

makes a restrictive endorsement (signs acco. no.
at the back)
Signs the check last
cancels the voucher; stamp as paid.

Question 7
Question 6

item b: should use PCF instead of

undeposited collections

Question 7
 Question 8

Kiting → Management Fraud

an attempt to overstate cash
money transferred is doubled in both accounts by taking
adv. of transferring during cut-off.
Overstating the collection
Lapping → Employee Fraud
Customer A receipt not recorded
Customer B receipt recorded as Customer A
Ommission of collection

Question 9

Posting Errors
Type 1
→ wrong amount posted
Type 2
→ wrong account posted
 Question 10

A:
high turnover = employee fraud
nts by taking risk indicator
B:
2 types of Fraud Normal on Mondays
Missappropriation of asset C:
→ employee fraud employee fraud
Fraudulent Financial Reporting risk indicator (checking acc. = disburseme
→ management fraud account)

Question 11
over = employee fraud
tor

n Mondays

fraud
tor (checking acc. = disbursements, not checking
Question 12
09. Substantive Testing

FS Assertions (3)
Account Balance
Transactions and Events
Presentation and Disclosure
Assets FS Assertions (3)
risk of overstatement Account Balance
Liabilities Transactions and Events
risk of understatement Presentation and Disclosure
SHE Account Balance (ECRV)
overstatement (higher equity = better) Existence
Completeness
Existence Rights and Obligations
Count Valuation
Completeness Transactions and Events
Quantity Occurence (interchangeabl
Valuation Completeness
Measurement Accuracy (interchangeable
Cut-off
Classification
Presentation and Disclo
Existence and Rights & Obl
Accuracy and Valuation (as
Understandability
Completeness
 Question 13

Responsible to prepare a bank reconciliatio

Client
Validates the bank recon prepared by the c
Audito

General Ledger
should be equal to the PCF wh
the GL

FS Assertions (3)
Account Balance
Transactions and Events
Presentation and Disclosure
FS Assertions (3)
Account Balance
Transactions and Events
Presentation and Disclosure
Account Balance (ECRV)
Existence
Completeness
Rights and Obligations
Valuation
Transactions and Events (OCACC)
Occurence (interchangeable with Existence)
Completeness
Accuracy (interchangeable to Valuation)
Cut-off
Classification
Presentation and Disclosure (ERO,AV,U,C)
Existence and Rights & Obligations (as a single assertion)
Accuracy and Valuation (as a single assertion)
Understandability
Completeness
 Cash Count

Valid support for cash (SOP-Wise): CRD Valid support for cas
SOP → Standard Operating Procedures SOP → Standard Op

prepare a bank reconciliation

bank recon prepared by the client

General Ledger
should be equal to the PCF when traced to
the GL
Cash Count

Valid support for cash (SOP-Wise): CRD

SOP → Standard Operating Procedures

Postage Stamp (a prepaid expense)

Not a valid support for petty cash fund
Only pre-numbered PCF vouchers classify as
expense for PCF.
Postage Stamps = not a PCF Voucher
Expense with no voucher = assumed
replenished

Valid supports under standard operating

procedures (SOP)

Valid supports OUTSIDE standard

operating procedures (SOP)

Accommodated Check
When the PCF is used to accomodate a
check
Adj. as receivable when defective or NSF
 Petty Cash Fund Accountabilities:
Checks = always accommodated check unless Petty Cash Fund
replenishment check → used or unused postage stamps = not val
ard operating Acceptable valid supports: any checks either stale, Undeposited Collections
NSF, and defective checks (unlike PCF) → used or unused postage stamps = valid
Not acceptable valid support: postage stamps (not Other (Intact)
an expense voucher) → ignore (intact = accounted separately from
and undeposited collections)
Undeposited Collections Other (Not intact)
Checks = accepted when depositable → added to currencies on hand/accountabilit
Not Acceptable valid supports: stale, NSF, and → means it is combined in the PCF and
DE standard defective checks (unlike PCF) since they are not undeposited collections
SOP) depositable
Acceptable valid support: postage stamps (not an
Check expense voucher)
When item is NOT INTACT
sed to accomodate a Step 1
Why are postage stamps valid supports for
Add to accountability to get tota
when defective or NSF undeposited collections?
Step 2
→ it is proof that the collection was used to pay for
Total accountability less cash ite
disbursements
shortage/overage
NOT Intact Step 3
Excess evidence of receipt of funds other than PCF Adjusted PCF = cash items
Temporary funds returned intact cash item

Note:
Adjusted PCF = cash items on
If item is NOT intact:
Adjusted PCF = [cash items o
 bilities:
h Fund
unused postage stamps = not valid
ted Collections
unused postage stamps = valid
tact)
(intact = accounted separately from PCF
osited collections)
ot intact)
to currencies on hand/accountability
t is combined in the PCF and
ed collections

When item is NOT INTACT

Step 1
Add to accountability to get total accountablity
Step 2
Total accountability less cash items on hand =
shortage/overage The ONLY acceptable valid support for
Step 3 disbursements when accountability is PCF:
Adjusted PCF = cash items on hand - not Petty Cash Exense Vouchers (not Postage Stamps)
intact cash item
NOTE: ADJUSTMENTS TO NON-CASH ITEMS
Note: Adjustments are only for up to Dec. 31 even if count
Adjusted PCF = cash items on hand date is beyond Dec. 31
If item is NOT intact:
Adjusted PCF = [cash items on hand - not intact]
 Question 14

Question 15

ort for CASH ITEMS

ility is PCF: No AJE required
stage Stamps) NON-CASH ITEMS
AJE required

CASH ITEMS
31 even if count

What is being count

valid supports (cash an
What is being count
valid supports (cash an
Question 14

Question 15

What is being counted?

valid supports (cash and non-cash items)
What is being counted?
valid supports (cash and non-cash items)
Question 16
AudProb Problem 1
"in an envelope"
= in-tact

Check drawn and payable to

All checks = disbursements
Payable to cashier = replenished
Check drawn and payable to
All checks = disbursements
Payable to cashier = replenished
Check drawn and payable to cashier
All checks = disbursements
Payable to cashier = replenished
Check drawn and payable to cashier
All checks = disbursements
Payable to cashier = replenished

"Money in envelope empty"

assumed as not in-tact/mixed in the
cash items
add to accountability/PCF
Postal Money orders and bank drafts Checks that are NOT expenses /
= replenishment: (TMP)
assumed as not in-tact/mixed in the Traveler's Checks
cash items Manager's Checks
add to accountability/PCF Postal Money Orders
investment in ordinary shares
equity inv. (not an asset with maturity date, so
not CCE) unless redeemable 3 months from
acquisition
AudProb Problem 2
Non-cash items
Expensed using the PCF
Not replenished
Postage Stamp (if accountability =
undeposited collections)

NOT Intact
Excess evidence of r
Temporary funds ret
NOT Intact
Excess evidence of receipt of funds other than PCF
Temporary funds returned

"After the cash count, the 500 cash was

deposited to the company's current account"
Implies that the 500 was INCLUDED in the count
(NOT INTACT)
Temporary funds returned = either intact or not
intact
AudProb Problem 3
Checks
drawn from customers = receipt
drawn from company = disbursem
Checks
drawn from customers = receipt
drawn from company = disbursement
10. BANK RECON: VALIDATION AUDIT PROCEDURES

Bank Confirmation
NOT a confirmation between auditor and confirming
party
IS a confirmation between CLIENT and
CONFIRMING PARTY
UNADJUSTED BALANCE → sub. to bank
confirmation
Cut-off Bank Statement
Bank statement of the ff. month
DIT/Undeposited Collections required to be
shown in cut-off bank statement
OC are not always seen in cut-off bank statements
(may not yet be cleared as outstanding)

Date on where these accounts are traced:

CEDURES

Question 17

NOTE
Outstanding checks can be traced to AP
vouchers
Priority of tracing Outstanding Checks =
Cut-off Bank Statements
ng checks can be traced to AP

tracing Outstanding Checks =

nk Statements
Question 18

Question 19
Question 20

Question 21
AudProb Problem 4
"included in the bank debits" → implied not yet
deducted in the books
(Book error corrected in current month !!!)
debits" → implied not yet
ks
Cash-balance wise: not required to record. REMEDY for return and redeposit
ALREADY recorded by one party:
NOTE: No effect on cash, but it is needed to record in IGNORE
the POC for POC purposes because it is not balanced if
left unrecorded since only the bank recorded the return and
redeposit.
REMEDY for return and redeposit NOT recorded
by one party:
Add to receipts and disbursements in book; OR
Deduct receipts and disbursements in bank
 DIT and OC for current month not indicated/missing; so,
refer to book
it is always assumed that banks should have DIT and OC's in
the current month.
Adj. book receipts/disb. = adj. book receipts/disb.
r return and redeposit (assuming there is no overage or shortage)
ecorded by one party:
AudProb Problem 5
AudProb Problem 5
01. FS PRESENTATION: INITIAL MEASUREMENT, TRANSACTION ANALYSIS, & BS DATE MEASUREMENT

02. MEASUREMENT OF RECEIVABLES

03. NOTES RECEIVABLE

04. RECEIVABLE FINANCING

05. FAR THEORIES

06. AUDITING PRACTICE

07. AUDIT CASES

08. EXPECTED CREDIT LOSS MODEL

 01. FS PRESENTATION: INITIAL MEASUREMENT, TRANSACTION ANALYSIS, & BS DA

ASUREMENT
ACTION ANALYSIS, & BS DATE MEASUREMENT
"Mutually exclusiv
If first criteria does n
current asset, move
so forth.
"Mutually exclusive" "Within 12 months"
If first criteria does not apply to qualify as Should not be collectible either 12 months or
current asset, move to criteria 2 and so on and beyond.
so forth.
Trade Receivables Receivables from inventories
always current regardless always current since inventories are ment to be
Non-trade Receivables held for sale in the normal operating cycle
current if collectible within 12 months (realization from inventories)

Non-current Receivables
presented as OTHER ASSET
ries Prepaid Operating Expense FAR Problem 01
ies are ment to be current since prepaid = being consumed in the
perating cycle normal course of the business

if NATURE of advances is SILENT Subscription recei

assumed non-trade (NT) collectible WITHIN
→ adv. to officers → current asset (rec
→ adv. to employees collectible 12 mont
→ claims against shipping company → deduction to CO
→ int. rec. from bonds → NOT non-curren
→ int. rec. from notes → NOT current

if MATURITY DATE or DATE OF

COLLECTIBILITY is silent
assume within 12 months unless otherwise
stated
 Unearned interest on receiva
discount on receivable to bring do
receivable's carrying value
discounts on receivables = discou
From officers (silent)
Officers are usually not involved i
otherwise stated, therefore, non
no maturity date given: assum
months (CURRENT)
Claims against shipping comp
Not directly related to trade itself
trade
NSF ceck from customer
customer = from trade; therefore
Subscription receivable
Trade receivable (assigned or
collectible WITHIN 12 months
Trade is always current regardles
→ current asset (receivable)
Post-dated check not yet reco
collectible 12 months and beyond
still cash, which must be adjusted
ny → deduction to CONTRIBUTED CAPITAL
receivables
→ NOT non-current asset
post-dated checks = receivable
→ NOT current

otherwise
Unearned interest on receivable Receivable Financing
discount on receivable to bring down to the collecting cash from the receivable WITHOUT collecting
receivable's carrying value cash from the customer themselves
discounts on receivables = discounted in advance → either through SALE or LOAN
From officers (silent) → receivable is used as collateral for either the SALE
Officers are usually not involved in operations unless or LOAN
otherwise stated, therefore, non-trade
no maturity date given: assumed within 12 Assignment and Pledging
months (CURRENT) collects the receivable through LOAN AGREEMENT using
Claims against shipping company the rec. as COLLATERAL (using the receivable of the
Not directly related to trade itself; therefore, non- customer as collateral)
trade Receivable is NOT DERECOGNIZED (still part of books)
NSF ceck from customer
customer = from trade; therefore current. Factoring and Discounting
Trade receivable (assigned or unassigned) collects the receivable through SALE AGREEMENT using
Trade is always current regardless the rec. as COLLATERAL
Post-dated check not yet recorded Receivable is DERECOGNIZED (not part of books
still cash, which must be adjusted/corrected to since it is sold)
receivables
post-dated checks = receivable
Implies that the 30K BDE incurred this year
and not from the beginning ABD bal.
02. MEASUREMENT OF RECEIVABLES

Gross method
AR is measured @invoice price
→ cash discount NOT deducted
Net method
AR is measured @invoice price - cash
discount
Invoice price
List price - trade discount
Cash price
= invoice price - cash discount
Measurement of AR under NET method
urred this year
BD bal.
Sales return AFTER collection
Sales returns xxx
Advances from customers xxx

Reasoning: cash was already received, so trea

pending return as payable until disbursed
 FOB Shipping Point (SP)
Buyer shoulders freight
Buyer Dr. Freight In
FOB Destination
Seller shoulders freight
Seller Dr. Freight Out
Discount forfeited
either (1) +sales or (2) +other income
Freight Collect
Buyer Cr. Cash
Seller collects cash from buyer
Freight Prepaid
Seller Cr. Cash
Buyer Cr. AP
urn AFTER collection Sales return BEFORE collection Sales Discount (SD) gross method
ns xxx Sales returns xxx taken:
s from customers xxx AR xxx deduction to AR and Sales (?)

: cash was already received, so treat Reasoning: cash is not yet received, so treat Cash xx
turn as payable until disbursed pending return as deduction to AR Sales D xx
AR xx
ping Point (SP)
ulders freight
Freight In
ination
ulders freight
reight Out

ollect
ash
cts cash from buyer
repaid
ash
P
BS Approach
Multiply rate to a balance sheet balance to
come up with the required allowance
On a PER CUSTOMER basis
On a PER GROUP where similar accounts are
grouped together if there are multiple accounts
→ e.g. aging of AR

x% x BS bal. = required bal.

FAR Problem 02

Sales returns where 30K is sales on cash "AMOUNT collected/received" = GROSS

basis excludes sales discount & allowances granted
Credit advances from customer (payable) amount collected = CASH COLLECTION and n
AR not affected collection

excess of 30K = sales returns before "ACCOUNT collected/received" = NET of

collection (AR is affected) excludes sales discount & allowances granted
"account collected" = TOTAL CREDITED TO

Amounts received representing recovery "AMOUNT collected/received" = GROSS o

No effect on AR Cash 5.1M
SD&A 70K
AR xx AR - GROSS 5.17M
ABD xx
"ACCOUNT collected/received" = NET of
Cash xx Cash 5.03M
AR xx SD&A 70K
AR - NET 5.1M
 Amount received from recovery = no effect on AR
AR 120K
ABD 120K

Cash 120K
AR 120K

T collected/received" = GROSS of SD&A

ales discount & allowances granted
llected = CASH COLLECTION and not AR

T collected/received" = NET of SD&A

ales discount & allowances granted
ollected" = TOTAL CREDITED TO AR

collected/received" = GROSS of SD&A

5.1M
70K
SS 5.17M

T collected/received" = NET of SD&A

5.03M
70K
5.1M
Beginning ABD NOT GIVEN
Current year ABD policy rate x AR, beginning
Policy rate for current year is usually the same for th
previous year/s unless otherwise stated
m recovery = no effect on AR FAR Problem 03

"AMOUNT collecte
EXCLUDES sales di
amount collected =
represents amount c
SD&A should be fu

"ACCOUNT collect
ALT. SOLUTION: 2,720,000 x 95% INCLUDES sales dis
(5% allowance) "account collected" =
SD&A is IGNORED
NOT GIVEN
policy rate x AR, beginning
rent year is usually the same for the
nless otherwise stated
FAR Problem 03

"AMOUNT collected/received" = GROSS of SD&A

EXCLUDES sales discount & allowances granted
amount collected = CASH COLLECTION and not AR collection
represents amount credited to AR EXCLUDING SD&A
SD&A should be further credited to AR

"ACCOUNT collected/received" = NET of SD&A

INCLUDES sales discount & allowances granted
"account collected" = TOTAL CREDITED TO AR
SD&A is IGNORED
 Amortized cost of AR:
560K - 77,784 = 482,216

FAR Problem 04

If Mark-up basis is SILENT: If mark-up based on cost:

based on SALES COS = 100%
sales = 100% + mark-up%

If mark-up is based on sales:

sales = 100%
COS = 100% - mark-up%
03. NOTES RECEIVABLE

loans receivable if BANK Creditor

trade receivable (always current) OWNER of the receivabl
Notes Receivable Debtor
either trade or non-trade party who OWES and pa
receivable

Direct origination cost

incurred because of the loan
paid by the owner of the receivable
if not incurred for the loan, it is not a
direct origniation cost

Origination Fee
direct origination cost paid by the debtor
if not incurred for the loan, it is not a direct
origniation cost chargeable to the debtor

Premium/Deferred Loss (POV: creditor)

Cash disbursed by creditor is more than the
principal amount loaned to the debtor

Deferred loss → POV of creditor

Deferred income (POV: creditor)

since cash disb. by creditor is more than
principal amount loaned, the effect is a
deduction to interest income during
amortization
Deferred income (POV: creditor)
since cash disb. by creditor is more than
principal amount loaned, the effect is a
deduction to interest income during
amortization

Discount/Deferred Income
discount = interest deducted in advance
cash disbursed is less than agreed principal
amount of the loan
amortization: increase interest income
Effective rate > nominal rate
 Creditor
OWNER of the receivable
Debtor
party who OWES and pays the
receivable

NON-CASH CONSIDERATIO

INVENTORY
based on cash price had the in
Notes receivable is treated as T
Entries:
NR - TRADE xx
Sales xx
PPE
cash price; FMV in absence of
Notes receivable is treated as N
Equipment is given @CV
Entries:
NR - NT xx
Gain (if applicable) xx
Loss (if applicable)
PPE (@CV)

OV: creditor) Premium/Deferred Loss (POV: DEBTOR)

ore than the a deduction to interest EXPENSE during
debtor amortization
deferred income in the POV of the debtor
r
Premium/Deferred Loss
itor) Effective interest is lower than the nominal
ore than rate
ect is a
e during PV of cash flows
used in absence of cash consideration given
up
 Premium/Deferred Loss
itor) Effective interest is lower than the nominal
ore than rate
ect is a
e during PV of cash flows
used in absence of cash consideration given
up
Discount/Premium on date of settlement:
n advance Principal Note - PV of note
eed principal
Debit/credit premium/discount
only when NR is debited at
income
principal amount

Discount
Credit (deferred income)
Premium
Debit (deferred loss)
NON-CASH CONSIDERATION Priority in non-cash consideration
Cash price equivalent (CPE)
INVENTORY PV of future cash flows
based on cash price had the inventory/ies been sold where gain/loss of PPE = PV of future cash flows
Notes receivable is treated as TRADE - CV of asset given up
Entries:
NR - TRADE xx
Sales xx PV of future cash flows:
PPE PV of Principal
cash price; FMV in absence of CP PV of interest payments
Notes receivable is treated as NON-TRADE cash received on the date of settlement
Equipment is given @CV (downpayment)
Entries:
NR - NT xx Gain/loss using PV of future cash flows:
Gain (if applicable) xx based on CV of non-cash given up vs. PF of
Loss (if applicable) xx future cash flows
PPE (@CV) xx PV of note:
PV of principal + PV of interest
Gain/Loss on PPE (non-cash payments
consideration) Discount/premium
= FV - CV PV of note - Principal
= total consideration - CV of PPE
FAR Problem 05

Note: PV OF FUTURE CASH FLOWS

always refer to the REMAINING term of if amount is to be received AT THE END OF THE MATURITY
the note rather than the total term in
(lumpsum) for either principal or interest
problem solving
→ PRINCIPAL x PF factor
Priority in non-cash consideration
Cash price equivalent (CPE) if amount is to be received through SERIAL collections for
PV of future cash flows either principal or interest
→ amount due per serial date collection x PV factor

PV of note: Note: term changes if collection is semi-annual or quarterly

PV of principal + PV of interest e.g.,
payments term of bond: 4 years
Discount/premium payment of interest: semi-annually
PV of note - Principal term used in PV factor for interest: 8
payment of principal: at the end of each year
Debit/credit premium/discount term used in PV factor for principal: 4
only when NR is debited at
principal amount PV factor formula:
lumpsum →
Discount (1/1+r)^n
Credit (deferred income) serial →
Premium [1-[(1/1+r)^n]]/r
Debit (deferred loss)
PV of cash already received = 1
e.g., 200K payment x 1 = 200K at date of settlement
F THE MATURITY

L collections for

PV factor

nual or quarterly

Alternative entry: Discount/Premium on d

ear Cash 200,000 settlement:
NR - NT 500,000 Principal Note - PV of note
Acc. Dep. 400,000
Eqp. 1,000,000 Gain/Loss on PPE (non-
Discount 36,460 consideration)
Gain on sale 64,540 = FV - CV
= total consideration- CV o
Correct interest income:
CV of note @PV x effective rate
the initial interest income (nominal rate x
principal) is adjusted to the correct
settlement interest income (CV of note @PV x
effective rate)
 Shortcut: CV or Amortized cost of the
financial asset in the year 2023

remaining term at 2023: n = 2

because 2021 = year of settlement with
original term of 4 years (ending 2025)

2022 Principal where n = 2

= 500K x (1/1+r)^n
Discount/Premium on date of Amortized amount = 453,515
settlement: debited to NR if @discount; credit to 2022 interest where n = 2
Principal Note - PV of note interest income = 500K x 0.03
→ ADD to CV of note @PV = 15K x [1-[(1/1+r)^n]]/r
Gain/Loss on PPE (non-cash credited to NR if @prem.; debit to = 27,891
consideration) interest income
= FV - CV → DEDUCT to CV of note @PV = 453,515 + 27,891
= total consideration- CV of PPE
= 481,406
tcut: CV or Amortized cost of the
cial asset in the year 2023

ining term at 2023: n = 2

se 2021 = year of settlement with
al term of 4 years (ending 2025)

Principal where n = 2
0K x (1/1+r)^n
3,515
interest where n = 2
0K x 0.03
K x [1-[(1/1+r)^n]]/r
891

3,515 + 27,891
1,406
FAR Problem 06

"Current portion"
All are current if the note is a trade NR

Non-interest Bearing
Nominal rate = 0%
No NOMINAL interest income in computing PV
Shortcut: CV or Amortized cost of the
financial asset in the year 2022
CV in the amortization table a
assumes (deducts) full interest
remaining term at 2022: n = 1
collectible for that specific year
because 2022 = year of settlement with
original term of 3 years (ending 2023)

2022 Principal where n = 2

r = 6%
= 4M x [1-[(1/1+r)^n]]/r
= 3,773,584.90
CV in the amortization table always
assumes (deducts) full interest
collectible for that specific year

Alternative for current portion at the end of Year 20

CV at end of 2021
- interest (prem.) for NEXT PERIOD
+ interest (disc.) for NEXT PERIOD
- CV at end of 2022
= Current portion at end of 2021

Note: CV at end of 2022 is non-current part

Alternative for current portion at the end of Year 20
CV at end of 2021
- interest (prem.) for NEXT PERIOD
+ interest (disc.) for NEXT PERIOD
- CV at end of 2022
= Current portion at end of 2021

Note: CV at end of 2022 is non-current part

Alternative for computing CV of note @PV in each y

Cash flow x PV factor where n = remaining term for that y

if note is 12M to be collected at end of term, use 12M and

factor appropriate for collection at the end of the term whe
= remaining term for that year.

If note is 12M but 4M to be collected each year, use 4M an

factor for ordinary annuity where n = remaining term for t
year.
 FAR Problem 07

Nominal interest
Based on principal m
collection already ma
Current portion of
Principal to collect
- amort. interest (dis
+ amort. interest (pr

nt portion at the end of Year 2021

EXT PERIOD
EXT PERIOD

end of 2021

22 is non-current part
nt portion at the end of Year 2021

EXT PERIOD
EXT PERIOD

end of 2021

22 is non-current part

uting CV of note @PV in each year

here n = remaining term for that year

ected at end of term, use 12M and PV

ollection at the end of the term where n
hat year.

o be collected each year, use 4M and PV

ity where n = remaining term for that
FAR Problem 07

Nominal interest
Based on principal minus principal
collection already made
Current portion of receivable:
Principal to collect next period
- amort. interest (disc.) next period
+ amort. interest (prem.) next period
04. RECEIVABLE FINANCING

Note:
Receivable financing is not part of PFRS 9
Related topic in PFRS 9: derecognition (to
determine if the asset qualifies for
derecgnition)

If qualified for derecognition, it is

considered as SALE
if not qualified for derecognition, consider it
as LOAN

When is a receivable financed as sale and

qualified for derecognition?
When the transfer has significant risks
and rewards
If no transfer of significant risks and
rewards, DO NOT consider as sale.
 Factoring and Discounting
"with recourse" means that a p
receivable cannot be received/
cannot be subject to derecogn
BE SOLD).
"without recourse" means that
THAT significant and may be s
derecognition (SALE)
Note that a portion of receivab
recourse with no significant rec
implying that it can be subject

Assignment
An additional JE is required to reclassify the
assigned receivable
Essentially the same with pledging, except
that receivables assigned should be
highlited through a JE
Factoring and Discounting JE for factoring or discounting Factoring vs. Discounting
"with recourse" means that a portion of the For AR Factoring
receivable cannot be received/SIGNIFICANT that it Cash xx → for open AR accounts
cannot be subject to derecognition (CANNOT JUST Loss on sale xx Discounting
BE SOLD). AR xx → for NR accounts
"without recourse" means that a portion is NOT Gain on sale xx
THAT significant and may be subject to → derecognized through sale
derecognition (SALE)
Note that a portion of receivable may have For NOTES RECEIVABLE
recourse with no significant recourse obligation, Cash xx
implying that it can be subject to derecognition. Loss on sale xx
NR xx
Interest Income xx
Gain on sale xx

Factoring/Discounting NOTES RECEIVABLES NR with recourse NOT SIGNIFICANT

Interest income earned from the note before sale obligation
(factoring/discounting) should be recognized With recourse
→ means that a portion cannot be paid fr

Factoring/Discounting NOTES RECEIVABLES AR sold with recourse but not significant

Interest income is also sold together with the → means that the amount with recour
notes receivable; hence both are credited upon should be a liability by crediting PROV
factoring/discounting RECOURSE OBLIGATION since a rece
collectible was sold.

JE for factoring or discounting

For AR
Cash xx
Loss on sale xx
AR xx
Gain on sale xx
→ derecognized through sale

For NOTES RECEIVABLE with recourse NOT

SIGNIFICANT RO
Provision on RO
Cash xx
Increases the loss on sale on
Loss on sale xx
factoring/discounting NR
NR xx
Decreases the gain on sale from
Interest Income xx
factoring/discounting NR
Gain on sale xx
Provision on RO xx
ing
FAR Problem 8
s

Note: losses or gains are recognized only

ourse NOT SIGNIFICANT recourse when the receiv. financing is a sale (either
factoring or discounting)

a portion cannot be paid from the AR

ecourse but not significant obligation

the amount with recourse sold
iability by crediting PROVISION ON
OBLIGATION since a receivable not
as sold.

on on RO
es the loss on sale on
/discounting NR
es the gain on sale from
/discounting NR
Factor withheld or Factor's Holdback
Amount withheld by the bank IN CASE of future sales
discounts and sales returns
PURPOSE: amount sold may be affected by future sales
returns/discounts, so the bank withholds the amount until
there are no possible SR&D's
Treated as receivable from the amount factored

Factoring fee = LOSS ON FACTORING

actor's Holdback
e bank IN CASE of future sales
urns
may be affected by future sales
e bank withholds the amount until
R&D's
om the amount factored

ON FACTORING
NR with recourse NOT SIGNIFICANT recourse For NOTES RECEIVABLE with recourse NOT
obligation SIGNIFICANT RO
With recourse Cash xx
→ means that a portion cannot be paid from the AR Loss on sale xx
NR xx
AR sold with recourse but not significant obligation Interest Income xx
→ means that the amount with recourse sold Gain on sale xx
should be a liability by crediting PROVISION ON Provision on RO xx
RECOURSE OBLIGATION since a receivable not
collectible was sold.
Provision on RO
Increases the loss on sale on
factoring/discounting NR
Decreases the gain on sale from
factoring/discounting NR

Factoring fee = INTEREST EXPENSE

When rec. financing is eiher pledging or
assignment
There is no loss on loans (pledging and
assignment) since no sale is incurred.
 Proceeds from discount
Cash to receive from discounting
Maturity value (MV) - Discount from bank

Maturity Value (MV)

INTEREST EXPENSE
= principal + interest income earned
occurs only during LOAN
Discount
(pleadging/assignment)
= MV x rate from bank x remaining term over 12
months of receivable being sold

NSE
ging or

g and
ed.
ENSE
g LOAN
nment)
05. FAR THEORIES

Item 4
Entries during recove
AR xx
ABD xx
→ no effect on AR

Cash xx
AR xx
→ decrease to AR
Item 4
Entries during recove
AR xx
ABD xx
→ no effect on AR

Cash xx
AR xx
→ decrease to AR
05. FAR THEORIES

Item 4
Entries during recovery:
AR xx
ABD xx
→ no effect on AR

Cash xx
AR xx
→ decrease to AR
Item 4
Entries during recovery:
AR xx
ABD xx
→ no effect on AR

Cash xx
AR xx
→ decrease to AR
item 9
Non-counterbalancing error
discount and interest income not
recognized in the first period
 06. AUDITING PRACTICE

item 9
Non-counterbalancing error
discount and interest income not
recognized in the first period
Cash → FARAP-01
Order → FARAP-02
Cash → FARAP-01
Order → FARAP-02
Voucher Preparation
Purchasing & disbursement
Purchase to pay
Not all control objectives are
significant as far as FS audit is
concerned. Only a select portion in an
assertion level.
Confirmation or count of Credit-worthiness checking
accounts Priority
→ existence assertion Financial Statement aspect

Availability of goods
Secondary
Operational Aspect
Deliveries done accurately
Priority
Financial Statement aspect

Deliveries done promptly

Secondary
Operational Aspect
Credit-worthiness checking
Priority
Financial Statement aspect

Availability of goods
Secondary
Operational Aspect
Billings for goods actually delivered
Priority
Financial Statement aspect

Prenumbering of bills/deliveries
Secondary
Operational Aspect
Item d
Recording, not billing
Tracing
Completeness
Vouching
Existence
 Risk
Billings for goods not delivered

t billing
ss

Situation:
Delivery = ok
Prenumbering of sales invoice = error

Item d:
There is a delivery but no invoice (WRONG)

Credit worthiness
valuation
Invoiced prices
prices = value
Type 1 Posting error
Wrong amount; correct account
Remedy: compare using control totals →
General ledger vs. subsidiary ledgers
→ invoice vs. ledger
Type 2 Posting error
Wrong account; correct amount
 Reliance Approach
Rely on internal control
IRxCR ↓ (low) risk

"below maximum"
Low IRxCR
ToC to perform
Reliance Approach
Rely on internal control
IRxCR ↓ (low) risk

Cash
main concern = existence and
occurence but not valuation since
cash is received at face value
 Blank confirmation letter
Rarely used for receivables since they
are usually overstated
Frequently used for payables since
they are usually understated

Confirmation replies
Should come from the auditor and not the
client
No reply after second set sent
Usually assumed maybe payment was
already settled, so refer to alternative
evidence to verify
If unsuccessful, the confirmation may
then come from the client
Confirmation Sample selection
ASSETS: no. 1 procedure is confirmaiton ASSETS: based on materiality (hig
LIABILITIES: an alternative procedure amount = higher risk of overstate
instead
LIABILITIES: equal chances of bei
Confirmation selected and NOT materiality (lower
→ mainly for existence higher risk of understatement)
Confirmation Sample selection
ASSETS: no. 1 procedure is confirmaiton ASSETS: based on materiality (hig
LIABILITIES: an alternative procedure amount = higher risk of overstate
instead
LIABILITIES: equal chances of bei
Confirmation selected and NOT materiality (lower
→ mainly for existence higher risk of understatement)
Liabilities
→ seeks completeness
 Item b
Negative confirmaiton letter
- low risk
- requires less persuasive evidence

Item b
May be interim
Item c
Should be client's headed notepaper
Item d
receivables = existence and rights

Sample selection
ASSETS: based on materiality (higher
amount = higher risk of overstatement

IABILITIES: equal chances of being

elected and NOT materiality (lower bal. =
igher risk of understatement)
Sample selection
ASSETS: based on materiality (higher
amount = higher risk of overstatement

IABILITIES: equal chances of being

elected and NOT materiality (lower bal. =
igher risk of understatement)
AR collected Dec. but
recorded Jan.

AR collected Jan. but

recorded Dec.
 FOB SP (in transit)
Valid sale (buyer shoulders freight when
SP in transit)
FOB SP (not in transit)
Not valid sale until in transit
FOB Destination (in transit or not)
Not valid sale (seller shoulders during
transit)
llected Dec. but FOB Destination (already delivered
ded Jan. physically)
Valid sale since FOD Destination transfers
ownership when asset arrives at
destination

ollected Jan. but

ded Dec.

Sale w/ Repurchase Excess over original SP is treated a

Not an outright sale. Either a lease or loan additional interest for the
(unless exception is implemented) repurchase, therefore a LOAN
The seller (us) can take back the asset Buyer has the right to resell or
(repurchase) repurchase with NO SIGNIFIC
INCENTIVE to resell
Refund liability recognized:
AR xx
Sale xx
(resell/repurchase made by buyer)
Expense xx
Refund liability xx
 "Vouched before BS date"
To prevent possible OVERSTATEMENTS,
therefore EXISTENCE assertion
To see if AR should be credited before BS date
"Vouching after BS date"
To prevent possible UNDERSTATEMENTS,
therefore COMPLETENESS assertion
To see if AR this year did not recognize AR from
last year

Excess over original SP is treated as

additional interest for the
repurchase, therefore a LOAN

Buyer has the right to resell or demand

repurchase with NO SIGNIFICANT ECONOMIC
INCENTIVE to resell
Refund liability recognized:
AR xx
Sale xx
(resell/repurchase made by buyer) → Sale for next year recorded
Expense xx this year
Refund liability xx Overstated AR this year
 Tracing
Completeness
Vouching
Existence

Situation: Increase in discount offered

Turnover of AR lowered = lowered means high turnover
rate of collection
Lower rate of collection = higher Liberal credit policy means less
age of AR strict credit poilicy
High age of AR = high default risk

The longer an asset is held (AR or

inventory), the valuation is at risk
 Increase in discount offered
Turnover of AR lowered = lowered means high turnover
rate of collection
Lower rate of collection = higher Liberal credit policy means less
age of AR strict credit poilicy
High age of AR = high default risk

The longer an asset is held (AR or

inventory), the valuation is at risk
 Turnover ratio statistics to
industry statistics
Analytical procedure only

Assessing allow. for uncollectible

accounts
Test of Details

Situation:
The longer an asset is held (AR or
inventory), the valuation is at risk

in discount offered
gh turnover

redit policy means less

dit poilicy
in discount offered
gh turnover

redit policy means less

dit poilicy
 07. AUDIT CASES

AudProb Problem 01

Adjustment to SL
Requires adjustment to Aging of AR
No JE to be made
Adjustment to GL
Requires additional JE

NOTE:
Unadjusted bal. of SL should total
unadjusted bal. of Aging of AR
Aduit → around BS Date (Dec

If current portion DUE (receiva

the past 60 days, then 60 days =
DECEMBER

1-60 days past due

2 months before the current port
OCTOBER)

61-120 past due

4 months before current portion

More than 120 days past due

5 months and beyond the curren
Aduit → around BS Date (December)

If current portion DUE (receivables)

the past 60 days, then 60 days = NOVEMBER &
DECEMBER

1-60 days past due

2 months before the current portion (SEPTEMBER &
OCTOBER)

61-120 past due

4 months before current portion (JULY & AUGUST)

More than 120 days past due

5 months and beyond the current period (JUNE and back)

Why does the SL prevail?

SL provides details such as:
- Debtor information
- Amount of debt
- invoice compositio n
 SL (always prevails)

Represents adjustments to be made to

the account above (in this case, SL)

Implies that these adjustments were

already made to the account below
(in this case, GL) but not yet to the
account above (in this case, SL)

GL

Aging of AR is derived from SL

Note that SL balance always prevails

Adjustment to SL
Requires adjustment to Aging of AR
No JE to be made
Adjustment to GL
Requires additional JE

NOTE:
Unadjusted bal. of SL should total
unadjusted bal. of Aging of AR
 Interpretation:
Deduction made meaning 140K AR Since 140K is included in SL but o
ts to be made to Deduction to the account above 84K is valid, deduct the invalid por
included in SL (account above) but
this case, SL) implies: from SL
not included in GL (account
included in the account above but not
below)
ustments were in the acocunt below Since 140K is not included in GL
e account below Added to the account above Consignment 84K is a valid sale, add to GL
not yet to the implies: Sale recognized only when consignee sells
is case, SL) not yet included in the account above, the goods
but included in the account below Sold: 84K, so add to AR Commission Fees not recognized
AR → 84K SL and GL
Sales → 84K Entries:
deducted 140K actual but should be add Commission Fees → 16.8K
84K, implies contrary, so add 84K to the AR → 16.8K
account below (GL)
 B&H Agreement
Valid even when no delivery made
ince 140K is included in SL but only
84K is valid, deduct the invalid portion
rom SL
Non-trade Receivables Deposit on long-term contract
ince 140K is not included in GL but Reclassify as "other asset" (NT
Separate line item
84K is a valid sale, add to GL Receivable)
Should be reclassified through another
JE if previously included in AR Reclassification of AR
mmission Fees not recognized in both Trade AR to Non-trade AR requires
and GL Subscription Receivables additional JE
tries: an ASSET if collectible within 12 Non-trade AR should not be in AR but
mmission Fees → 16.8K months instead in a separate line item
AR → 16.8K Deduction to Contributed Capital
Credit bal. from customer AR
if collectible in 12 months and beyond
Treat as liability
AR → xx
Adv. from
customers → xx

"to affiliated company"

Inv. in associate xx
Adv. to associate xx
it on long-term contract
ify as "other asset" (NT
ble)
sification of AR
AR to Non-trade AR requires
nal JE
ade AR should not be in AR but
in a separate line item

bal. from customer AR

s liability
xx
rom
mers → xx

If GL =/= SL, SL always prevails. Adjust

GL to equal SL

If GL < SL
AR xx
Sales xx
If GL > SL
Sales xx
AR xx
 Adjustment to SL Why does GL require AJE while SL d
Requires adjustment to Aging of AR not?
No JE to be made Accounting process:
Adjustment to GL GL first beore SL.
Requires additional JE Therefore, adjustments in SL mean they
already recorded first in GL.
NOTE:
Unadjusted bal. of SL should total
unadjusted bal. of Aging of AR

always prevails. Adjust Allowances for SD&R in future but

recognized in current period
Entries:
SD xx
Allow. for SD&R xx

Note: this entry will be reversed in the

subsequent period. Adjustment is made
to recognize future deductible allowances
in AR.
 does GL require AJE while SL does

unting process:
rst beore SL.
efore, adjustments in SL mean they are
dy recorded first in GL.
Assuming 105,700 = ABD end. before
audit
BDE = 102,300

Note: Computation of Bad Debts E

23.5K and 135K were already recorded
per books (already deducted in GL Assuming given: ABD End. be
but was still in SL)
+ ABD End. before audit
Computation of Bad Debts Expense + Recoveries per audit
+ Bad Debts Expense
Assuming given: ABD Beginning - Write-offs per audit
= ABD End. (required allow
+ ABD Beginning
+ Recoveried per books
+ Recoveries per audit Write-off and recovery per
+ Bad Debts Expense audit
- Write-offs per books included in SL but not in GL
- Write-offs per audit
= ABD End. (required allow.)
 AudProb Problem 02

Computation of Bad Debts Expense

Assuming given: ABD End. before audit

+ ABD End. before audit

+ Recoveries per audit
+ Bad Debts Expense
- Write-offs per audit
= ABD End. (required allow.)

Write-off and recovery per

audit
included in SL but not in GL
Note:
Entry made: Should be:
ABD end. before audit is given
Cash 7.5K AR 7.5K
AR 7.5K ABD 7.5K

Cash 7.5K
AR 7.5K

When should payment of AR be

recorded?
When check is received. As of June
30, consider it as AR in transit (no
AJE needed)

Sales Returns
Shipment of merchandise from a
customer only occurs during sales
returns

GL and SL affected since it was not

recorded in any of them

There is no indication that it was

correctly recorded in either GL or
SL, so adjust to both
de: Should be: No effect in Aging of AR since it was
AR 7.5K already collected (hence not an AR) Type 2 posting error
7.5K ABD 7.5K Correct amount; wrong account

Cash 7.5K GL and SL affected since it was not

AR 7.5K recorded in any of them

uld payment of AR be "Evidence = persuasive; not conclusive"

k is received. As of June
r it as AR in transit (no
d)
Situation:
Amount deducted from Delta instead of
Charlie
Deduction from Delta incorrectly deducted
<60 aged receivables, so add back and
urns Entry Made (EM): deduct in the correct age for Charlie
f merchandise from a Purchases xx
only occurs during sales AP xx

Situation
"shipment 8K made in June" = already
SL affected since it was not in-transit
ed in any of them FOD Destination = not valid sale until
delivered to destination
e is no indication that it was
ctly recorded in either GL or
o adjust to both
There is no indication that it w
correctly recorded in either GL
SL, so adjust to both
 Situation:
EM:
AR 14K
osting error Sales 14K
mount; wrong account No adjustment to GL and SL
since amount is correct in terms
Cash 18K
of valuaiton
Sales 18K

There is no indication that it was

correctly recorded in either GL or
SL, so adjust to both

ducted from Delta instead of

Situation:
from Delta incorrectly deducted 6K was recorded in AR as seen in the
receivables, so add back and given even when it was on consignment
he correct age for Charlie

EM:
8K made in June" = already AR
Sales
nation = not valid sale until Sale = not yet valid; so reverse.
o destination
There is no indication that it was
correctly recorded in either GL or
SL, so adjust to both
 "Deposits from customers" Note:
CE: Another term for "advances" from The credit memo may either be SR or
4K Cash 18K customers SD
14K Adv. 18K The CM is in possession but was
recorded after July, so AR is overstated
8K Adv. 4K and should be adjusted
18K AR 4K No adjustment necessary if CM was not
yet issued/received

o indication that it was

ecorded in either GL or
ust to both

: "Goods cost P4,400 included in Note:

orded in AR as seen in the inventory" is correct since This write-off was from per
when it was on consignment consignment does not mean audit and not per books
derecgnition of inventory until
consignee sells.
 If GL =/= SL, SL always prevails. Adjust
memo may either be SR or
GL to equal SL
n possession but was
If GL < SL
fter July, so AR is overstated
AR xx
be adjusted
Sales xx
ment necessary if CM was not
If GL > SL
received
Sales xx
AR xx

Note:
CV of receivables @amortized cost is AR net o
allowances for:
- Bad Debts
- Sales Discounts
- Sales Returns

e-off was from per

nd not per books
 Note
vables @amortized cost is AR net of Adjusted AR bal. = gross of
for: allowances
s AR @amortized cost = net of
counts allowances
urns
08. EXPECTED CREDIT LOSS MODEL
CTED CREDIT LOSS MODEL

Stage 1
Impairment loss/credit loss is
recognized at initial recognition based
on the next 12 months
 Gist
t loss/credit loss is Impairment or credit loss is projected in the
at initial recognition based next 12 months based on the projected
t 12 months cash flows
If credit risk/impairment is increased,
PV of estimated CL x probability of default
shift to stage 2
= initial impairment loss or REQUIRED
From 12 months ECL to Lifetime ECL
ALLOWANCE for credit loss or impairment in
the next 12 months
Significant increase in credit
Computation of interest income is still risk/impairment
THE SAME "usually occurs when a receivable is
past due for more than 30 days"
risk/impairment is increased, Stage 1
tage 2 Project credit loss for the next 12
2 months ECL to Lifetime ECL months
Stage 2
Project credit loss for the ENTIRE
nt increase in credit
TERM
airment When to proceed to stage 3?
y occurs when a receivable is When there is an objective evidence
PV of estimated CL x probability of
e for more than 30 days" of impairment
default = initial impairment loss or
When the configuration of cash flows
REQUIRED ALLOWANCE for credit loss
changes
or impairment for the entire term.

Computation of interest income is

still THE SAME When the debt is restructured (princ
decreased, maturity is extended, etc

debt restructuring modification

terms in the POV of the debtor, st
impairment loss in the POV of cre
 AudProb P

o proceed to stage 3? Observe how the computation of

ere is an objective evidence allowance is changed
ment
e configuration of cash flows CV/Amort. cost x PV of NEW FCF

When the debt is restructured (principal is

decreased, maturity is extended, etc.

debt restructuring modification of

erms in the POV of the debtor, stage 3
mpairment loss in the POV of creditor

Why still use the original effective

interest?
The old receivable is still used. The
amount fluctuates but the effective
interest should still be the same

Stage 1 and 2 interest income

ignores allowance for impairment
Stage 3
interest income is net of allowance for
impairment
AudProb Problem 03
No entry required to
recognize impairment loss

There is no significan
or evidence of credit
impairment
 AudProb Problem

There is no significant increase

or evidence of credit loss or
impairment
AudProb Problem 04

Note that the 100K i

If the given is not @
original effective inte

Stage 1 and 2 inte

ignores allowance fo
Stage 3
interest income is ne
impairment
 Why is the allowance
PV?
The allowance for
incur accretion ex

Note that the 100K is already at PV.

If the given is not @PV, use the
original effective interest rate

Stage 1 and 2 interest income

ignores allowance for impairment
Stage 3
interest income is net of allowance for
impairment
Why is the allowance for impairment at
PV?
The allowance for impairment will also
incur accretion expense
When to proceed
When there is an ob
of impairment
When the configurat
changes
When to proceed to stage 3?
When there is an objective evidence
of impairment
When the configuration of cash flows
changes

When the debt is restructured (principal is

decreased, maturity is extended, etc. ECL Model Steps (

debt restructuring modification of [01] Compute the a

terms in the POV of the debtor, stage 3 recognition
impairment loss in the POV of creditor BD Expense or Loss
Allow. for BD/CL
[02] CV at initial rec
+ PV of FCF @initial
- Allow. for CL @initi
[03] In stage 1 and
income is still based
Ignore allowance for
interest income durin
[04] Compute for ac
impairment each yea
Accretion is based o
beginning of the yea
Entries for accretion
Interest Expense
Allow. for CL/BD
[05] During a revisi
CL/impairment
First compute the ac
allowance for CL in t
Update the beg. allo
period.
Next, compute for th
CL
→ PV of future CL x
Deduct the current (
before revision to th
to compute how mu
recognize from the r
 Stage 3 Steps (? lo

[01] Compute for th

receivables before st
before stage 3)
[02] Compute for th
collectible from the
[03] Step 1 minus st
[03] Interest income
of the receivables

ECL Model Steps (? lol)

[01] Compute the allowance for BD or CL at initial

recognition
BD Expense or Loss xx Allowance for CL/Impairent =
Allow. for BD/CL xx PV of future CL x Probability of default
[02] CV at initial recognition is
+ PV of FCF @initial recognition
- Allow. for CL @initial recognition Required allowance for the
[03] In stage 1 and 2, amortization of interest year before year-end
income is still based on PV of FCF accretion of impairment
Ignore allowance for CL in the amortization of
interest income during stage 1 and 2
[04] Compute for accretion of allowance for
impairment each year-end Accretion increases the allowance for
Accretion is based on allowance for CL at the CL/Impairment, which decreases the CV or
beginning of the year x effective interest amortized cost of the AR.
Entries for accretion:
Interest Expense xx Note: During stage 1 and 2, computation of
Allow. for CL/BD xx amortized interest income is based on PV of
[05] During a revision in allowance for FCF ignoring allowance for CL/impairment
CL/impairment
First compute the accretion based on the CV of
allowance for CL in the beginning of the year.
Update the beg. allow. with the accretion for the
period.
Next, compute for the revised required allow. for
CL
→ PV of future CL x probability of default + Revised Allow. for CL
Deduct the current (carrying amount) allow. for CL - CV of allow. for CL
before revision to the revised required allow. for CL = Loss/BD Exp.
to compute how much BD expense is required to
recognize from the revision Loss/BD Exp. xx
Allow. for BD xx

Note that allowance is cumulative from

previous periods
Stage 3 Steps (? lol)

[01] Compute for the CV @amortized cost of the

receivables before stage 3 (gross of allow. for CL
before stage 3)
[02] Compute for the REVISED PV of receivables
collectible from the principal
[03] Step 1 minus step 2 = REVISED ALLOW. FOR CL
[03] Interest income recognized is now based on NET CV
of the receivables
01. INVENTORIES: CONCEPT RECALL

02. CONSIGNMENT

03. BS DATE MEASUREMENT

03. BS DATE MEASUREMENT

04. INVENTORY ESTIMATION: GP METHOD

05. INVENTORY ESTIMATION: RETAIL METHOD

06. AUDIT PRACTICE

07. AUDIT PROBLEMS

01. INVENTORIES: CONCEPT RECALL

Manufacturing Industries Normally 4th according

Have a distinction between STORE & to liquidity Input VAT
OFFICE supplies and FACTORY supplies REFUNDABLE; n
of the inventory
Store and Office Supplies
Prepaid Expense NON-REFUND
Factory Supplies Included in the
Part of Inventory (consumed) inventory

Cost of invty
Only up to trans
(INCIDENTAL)

Costs incurred i
depreciation of
PART OF COST

Storage Costs
ready for sale; n
product
Storage Costs
process
Capitalizable to
Input VAT Input VAT (Dr.) is later deducted
REFUNDABLE; not included in cost to OUTPUT VAT (Cr.) to compute
of the inventory VAT Payable

NON-REFUNDABLE TAXES
Included in the cost of the
inventory

Cost of invty
Only up to transferring of FG to warehouse
(INCIDENTAL)

Costs incurred in warehouse such as

depreciation of warehouse, utilities, etc. = NOT
PART OF COST OF INVENTORY

Storage Costs (for FG)

ready for sale; not capitalized to cost of
product
Storage Costs for goods still in
process
Capitalizable to the asset being made.
 Sale w/ Right of Return
→ VALID sale

Exception to the exception in

transferring control
Sale w/ right of return where
customer has no economic incentive (RP
< OSP lease) during a REPURCHASE
AGREEMENT
RP < FV of asset financing agreement
during a REPURCHASE AGREEMENT
 Sale w/ Repurchase Agreement
→ NOT a VALID sale
→ either LEASE or LOAN

Sale w/ Right of Return

→ VALID sale
 FAR Problem 01

rchase Agreement
LID sale
ASE or LOAN

Mark-up on sales
100% = sales
Mark-up on cost
100% = cost
What if still in transit @FOB
Dest.?
Include @cost
Freight to deliver still in transit →
expense

FREE ALONG SIDE

= FOB SHIPPING POINT

Free up to vessel; shouldered

by buyer when shipped to the
vessel

CIF
Same as FOB SP

COST OF INSURANCE & Transferred upon SP

FREIGHT [CIF] CIF → paid by seller
International shipping term;
hybrid between FOB SP and
Dest.
FAR Problem 02
Requested by customer =
B&H Agreement

Not a valid sale whether lease or

financing agreement

Repurchase agreement can become a

sale (w/ right of return) when the
customer has the option to exercise
and has no economic incentive in the
repurchase agreement
FAR Problem 03

FREIGHT TERMS Freight-In

Included in cost of inventory
FREIGHT COST ON PURCHASES Freight out
(FREIGHT-IN) Outright expensed
Included in cost of the inventory Freight on goods out on
FREE ALONG SIDE consignment
FOB SP Included in cost of inventory
Free up to vessel; shouldered by buyer when Freight on goods out on
shipped to the vessel consignment RETURNED
Cost alongside Vessel = SELLER Outright expensed
Freight cost = BUYER
CIF
FOB SP (hybrid between SP and Dest.)
International shipping term; hybrid between
FOB SP and Dest.
LAY AWAY SALES
Legal title is delivered UPON FULL PAYMENT
ONLY
B&H AGREEMENT
Valid sale even when not yet delivered
Customer has control while product is ready for
shipment
under customization by special customer;
SALE ON APPROVAL W/ RIGHT OF
RETURN
Sale is valid only after period of right of
return lapses or when confirmed to have no
returns made
Manufacturing Industries Cost of invty
Have a distinction between STORE & Only up to transferring of FG to warehouse
OFFICE supplies and FACTORY supplies (INCIDENTAL)

Store and Office Supplies Costs incurred in warehouse such as

Prepaid Expense depreciation of warehouse, utilities, etc. = NOT
Factory Supplies PART OF COST OF INVENTORY
Part of Inventory (consumed)
Storage Costs (for FG)
ready for sale; not capitalized to cost of
product
Storage Costs for goods still in
process
Capitalizable to the asset being made.
02. CONSIGNMENT

All expenses should be

covered by NOR—
including costs paid by
NEE
FAR Problem 04
03. BS DATE MEASUREMENT

[AVERAGE COST FORMULA]

PERPETUAL MOVING AVERAGE (PERPETUAL)

COGS and Inventory is updated Changes for every different purchase
for every transaction transaction made
PERIODIC
COGS and inventory is updated
at YE rather than each
transaction WEIGHTED AVERAGE (PERIODIC)
COGAS / GAS

When is specific identification cost When can FIFO and AVERAGE cost
formula used? formula be used?
When the inventories are: When the inventories are:
a. Not homogeneous a. Homogeneous
b. High value b. Low value
c. Low turn-over c. High turn-over
 FAR Problem 05

GE cost
FAR Problem 06
Merch. Inv., FG, and WIP
Always (automatically) tested for
NRV writedown.
Raw Materials
Not always tested for writedown.
Only when related FG is written
down.

When to use allowance method?

When there is potential for possible
recovery from loss
Due to economic indicators
NRV > Cost When to use direct w/off method?
Loss under DIRECT WRITE-OFF When there is no expected recovery from
METHOD loss
Allowance for writedown under Due to physical damages
ALLOWANCE METHOD

Where to record the loss or

allowance?
COS
When the loss is IMMATERIAL
Other Expense
When the loss is MATERIAL
FAR Problem 07

Note:
Cost vs. NRV = REQUIRED
ALLOWANCE
Required allowance - beg.
allowance = LOSS incurred in
the period
Steps in RM writedown
Cost to produce FG includes:
1. Projected costs for DL
2. Projected costs for OH
3. RM

Compare projected cost of FG

to projected NRV

If lower, RM is written down to its

RC or CPP
FAR Problem 08

Default assumption:
Individual approach
04. INVENTORY ESTIMATION: GP METHOD

Purpose of inventory estimation

Determining the cost of inventory w/o
rendering physical count
Due to:
1. lost inventory from theft or caualties
2. physical count not practicable
Default: Sales returns Normal and Abnormal Bre
Based on sales HAVE physical transfer back of not included in ending invento
goods
to keep sales at GROSS, deduct SR ABNORMAL Breakages
Why IGNORE disc. to CUSTOMERS in from sales Add to COS to exclude from E
computing GROSS SALES? inventory
Goal is to keep sales AT GROSS. Effect os Sales allowances NORMAL Breakages
Sales Disc. is to deduct—so ignore. NO physical transfer back of Add to sales to include in COS
Sales account is recorded at gross before goods YET exclude from ENDING invento
discount is exercised. Ignored since allowances are only
estimates for potential
AR xx transfers
Sales xx

Cash xx Gross sales Abnormal breakages

Sales D. xx Gross of discounts & Eliminated from COGAS to
AR xx allowances, net of returns exclude in EI
Normal breakages
Eliminated by adding to sales
and selling price to include in
Why ADD disc. to EMPLOYEES in COS to exclude in EI
computing GROSS SALES?
Goal is to keep sales AT GROSS.
Special discounts are automatically
deducted from sales unlike discounts to
customers.

AR xx net of disc.
Sales xx net of disc.
Normal and Abnormal Breakages FAR Problem 09
not included in ending inventory

ABNORMAL Breakages
Add to COS to exclude from ENDING
inventory
NORMAL Breakages
Add to sales to include in COS and
exclude from ENDING inventory

Abnormal breakages If breakages or shrinkage

Eliminated from COGAS to given is @cost
exclude in EI it is ABNORMAL since abnormal
Normal breakages B/S is directly added to COS
Eliminated by adding to sales If B/S given is @SP
and selling price to include in it is NORMAL since normal
COS to exclude in EI shortages are added to sales
FAR Problem 10
WIP not given
assumed as loss from the
event

Where are losses added?

Either COS or Other Expenses
05. INVENTORY ESTIMATION: RETAIL METHOD
RETAIL METHOD

Retail Method
Same pro-forma but
@RETAIL PRICE

When does a retail price

occur?
When a physical good is
ready-made or ready for
retail

FIFO METHOD
in FIFO, beg. inventory should be
sold first, that is why COGAS @cost
and @retail deducts BI

LCA
Spoilage/Breakage @retail Has a lower cost%
and @cost (conservative) since
ABNORMAL B/S not considered or dedu
Spoilage/Breakage @retail denominator
ONLY Conservative = lowe
NORMAL B/S
 FAR Problem 11

Normal B/S having no cost Mark-up/down

suggests that it is indeed Gross / excludes mark-up/down
normal cancellation
NET Mark-up/down
Already deducted
mark-up/down cancellation
LCA
Has a lower cost%
(conservative) since mark down is
not considered or deducted in the
denominator
Conservative = lower
Mark-up/down
Gross / excludes mark-up/down
cancellation
NET Mark-up/down
Already deducted
mark-up/down cancellation
 FOREX differences
Either gain or loss from exchange
Sorage costs
Inventoriable when still in process, but
outright expensed when finished
Taxes and import duties
Import duties are inventoriable, but VAT
should be non-refundable
Abnormal B/S
Deducted from COGAS; excluded from
ENDING INVENTORY

When loss is asked:

Since all inventories are destroyed (in
possession), only the ones not
destroyed remain (see items a and b)
 ge

ess, but
ed

, but VAT

ed from

FIFO
Assuming COS stays the same and SP
is based on the market during
inflation, FIFO will give the highest NI
AVERAGE METHOD
COS and ending inventory are relatively
the same (averaged)
Direct method
No allowance is recognized;
directly use loss account instead

When to use invty. ESTIMATION?

When it is done frequently (not once a
year or annual)
When it is impossible to physically count
the goods itself
Proof of reasonable accuracy of physical
count given (since accuracy should be
estimated?)
Retail Method
COGAS @retail
- GROSS SALES @retail
= EI x Cost %

Gross sales includes Normal B/S and is

deducted from COGAS (added to gross
sales) to compute EI
 Opening stock
same as BEGINNING INVENTORY
included in the cost ratio for
AVERAGE METHOD and
CONSERVATIVE
excluded in the cost ratio for FIFO
METHOD

rmal B/S and is

(added to gross
 06. AUDIT PRACTICE

NVENTORY
io for
d

tio for FIFO

Purchase to pay
Recognition of inventory
Order to cash
Derecognition of inventory
Plan to inventory
Convertion
Overproduction
Affects the FS aspect
Underproduction
Operational aspect

Overproduction
Slow movement of assets = higher risk
of obsolecense
Obsolecense affects the value
(VALUATION)
ssets = higher risk

s the value
Production wastages
valuation affected
Loss from productoin
exstence assertion affected
s

n
cted

Why is a wrong?
should be periodic reconciliation of
physical count and perpetual
records instead.
 ong?
iodic reconciliation of
unt and perpetual
ead.
Inaccurate costing (COST)
OVERSTATEMENT of asset
valuation is affected
Inaccurate inventory records (COUNT)
UNDERSTATEMENT of asset
Completeness and existence are affected
 Inaccurate costing
OVERSTATEMENT of asset
valuation is affected
Inaccurate inventory records
COST) Inventory recording UNDERSTATEMENT of asset
set → should be periodic reconcilliation (once Completeness and existence are
a year) affected
y records (COUNT)
asset
ence are affected
 Inaccurate costing (COST)
OVERSTATEMENT of asset
valuation is affected
ng Inaccurate inventory records (COUNT)
of asset UNDERSTATEMENT of asset
d Completeness and existence are affected
ntory records
T of asset
existence are

Inventry Extension
Mathematical Accuracy
COST) Inventory recording
set → should be periodic reconcilliation (once
a year)
y records (COUNT)
asset
ence are affected
AR/Sales
Concern over SJ
Inventories
When is the count date
Asset concern RR = receiving report
Overstatement
Existence
Liabilities concern
Understatement
Completeness
RR = receiving report
TRACING ASSETS
(OVERSTATEMENT RISK)
Actual data to client data
(assuming actual is understated for
assets, COMPLETENESS)
Client data to actual data
(assuming actual is overstated for
assets, EXISTENCE)
 Test count to client data
Test Counts
→ AUDITOR
Client data
→ CLIENT (OVERSTATEMENT
RISK)

Clients tend to OVERSTATE

ASSETS

Shipping Documents
Test counts (actual documents)
UNDERSTATED ASSUMPTION FOR ASSET
(FROM AUDITOR)
Pre-numbered SI
 Shipping Documents
Test counts (actual documents)
UNDERSTATED ASSUMPTION FOR ASSET
(FROM AUDITOR)
Pre-numbered SI
Provided from client
OVERSTATED ASSUMPTION FOR ASSET
(FROM CLIENT)

Why client to test count =

existence?
Assume the client OVERSTATES
assets and UNDERSTATES
liabilities

ING ASSETS TRACING

RSTATEMENT RISK) Tracing from ACTUAL to CLIENT
data to client data DATA
ming actual is understated for VOUCHING
s, COMPLETENESS) Vouching from client data to actual
data to actual data
ming actual is overstated for
s, EXISTENCE)
 Client data (OVERSTATED
ASSUMPTION) to actual data
Vouching
Actual data (UNDERSTATED
ASSUMPTION) to client data
Tracing

ata

MENT

ATE
Inventory Estimation
Covers Existence and Rights,
Valuation, and Completeness

Why? Because it is an
ANALYTICAL PROCEDURE
 tion
nd Rights,
pleteness Drawback on analytical procedures such
as INVENTORY ESTIMATION
an When per audit vs. per book has a difference
OCEDURE (MATERIAL MISSTATEMENT), you cannot
pinpoint the adjustment since it is only an
ESTIMATE

TEST OF DETAILS such as sales cut-off and

purchases cut-off can pinpoint the
adjustments since these are physical counts
and NOT estimates.

WHEN TO PERFORM ANALYTICAL

PROCEDURES?
When based on historical data, there are no
expected material misstatements or when
there is LOW RISK OF RMM
cal procedures such Analytical procedures are
MATION only OPTIONAL
book has a difference
ENT), you cannot
t since it is only an

ch as sales cut-off and

inpoint the
e are physical counts

ANALYTICAL

al data, there are no

atements or when
RMM
The auditor holds data of
subsequent events /
records during the audit
Not all inventories owned are
ON HAND
Consigned, B&H Agreement, Right
of return, etc..
 07. AUDIT PROBLEMS

s owned are

reement, Right
AudProb Problem 01
Costs incurred for purchased
goods in-transit
CAPITALIZABLE
Costs incurred for goods in
warehouse
EXPENSED
AudProb Problem 02
Commission Expense xx
AR/Cash xx

(assume AR when silent on cash)

 Implies that 712 is not yet Implies that 908 was included in
shipped but still included in the physical count (last
sales receipt receiving report in 2020) but
recorded in January

Understated purchases =
understaed COGAS

understated costs =
overstated NI, so deduct NI

Valid when physically

received

Understated purchases =
understaed COGAS

understated costs =
overstated NI, so deduct NI
 Advance payment does not mean Advance payment
valid sale Cash xx
Valid sale is when the goods are AP xx
physcially delivered

When inventory (ASSET) is understated, NI

or Income Summary is also understated
When purchases (COST) is understated, NI
is overstated

When inventory (ASSET) is understated,

NI or Income Summary is also understated
When purchases (COST) is understated, NI
is overstated
Not a valid sale, but incorrectly
recorded as sale

Not a valid sale, correctly not

recorded as sale
Freight deducted from gross CORRECTLY MADE
invoice
AR xx NO ADJUSTMENT
Sales xx NEEDED

Freight xx
AR xx

→ FOB DESTINATION

Freight paid by seller and included in the

invoice

(increase AP for buyer, increase AR

for seller)

Buyer
Freight xx
AP xx
Seller
AR xx
Cash xx

→ FOB SHIPPING POINT

Correctly included in
physcial count since it is
FOB SHIPPING POINT
01. INTRODUCTION

02. BORROWING COST

03. BS DATE MEASUREMENT

04. WASTING ASSET

05. IMPAIRMENT

06. FAR THEORIES

07. AUDIT PRACTICE

08. AUDIT PROBLEMS

09. SUBSEQUENT COSTS AFTER INITIAL RECOGNITION

10. IMPAIRMENT OF CGU

11. APPRAISAL MODEL

01. INTRODUCTION

held for "rental to others"

Exception: if it is a REAL
PROPERTY (land or building), it
is classified as INVESTMENT
PROPERTY rather than PPE
Compute CPE when CPP
is not given
If given: (1) FMV of PPE and (2) Shares Priority = FMV of PPE received
actively traded in PSE, use FV of shares when given (during issuance of
actively traded since they are more shares for PPE)
determinable

With comm. substance

Income-generating asset
When the cash flows of the related
assets are materially different

W/o comm. substance

No income generated
FAR Problem 01
FAR Problem 01 FAR Problem 02
FAR Problem 02 FAR Problem 03
FAR Problem 03 FAR Problem 04
FAR Problem 04
 02. BORROWING COST

Assumption:
BV = 50K
FV = 45K (IMPAIRED)

W/O Comm. Substance but:

BV > FV
Recognize at FV +/- cash
paid/received (AFTER
IMPAIRMENT)
W/O Comm. Substance but:
BV > FV
Recognize at FV +/- cash
paid/received (AFTER
IMPAIRMENT)
02. BORROWING COST

Capitalizable BC should not excee

Actual BC
if it incurrs, only recognize
Capitalizable BC = to Actual BC
(INTEREST EXPENSE = ZERO)
 SPECIFIC BORROWING
Exists due to the qualifying
GENERAL BORROWING
Exists with or without the
qualifying asset
Interest incurred outside
construction period COMBINED SPECIFIC AND
Outright expensed GENERAL BORROWING

Capitalizable BC should not exceed Actual BC

Actual BC Borrowed amount
if it incurrs, only recognize Capitalizable BC
Capitalizable BC = to Actual BC Spent from borrowed amount
(INTEREST EXPENSE = ZERO)
Interest expense on BC
ABC - CBC
Only up to the borrowed amount
allowed

If CBC > ABC

Excess cannot be interest
expense from BC
Recognize as personal expense
SPECIFIC BORROWING
Exists due to the qualifying asset
GENERAL BORROWING
Exists with or without the
qualifying asset

COMBINED SPECIFIC AND Since SPECIFIC B exists only for

GENERAL BORROWING the QA, then:
Only ACTUAL BC is capitalized

Income earned during

construction is used to
pay-off the BC
Since SPECIFIC B exists only for SPECIFIC BC
the QA, then: All are expected to be used GENERAL BC
Only ACTUAL BC is capitalized for the QA Not all are expected to be
used for the QA

Income earned during

construction is used to
pay-off the BC

The effective interest

than one GB, use AVE
all GB)

Denominator = no. of
construction period
GENERAL BC WAAEX
Not all are expected to be Based on how much was
used for the QA spent

The effective interest rate (if more

than one GB, use AVERAGE interest on
all GB)

Denominator = no. of months of the

construction period
 FAR Problem 06

Reasoning: finish all SPECIFIC

BC before using the GENERAL BC

All expenditures
were shouldered
by SPECIFIC BC

Excess is shouldered
by the GENERAL BC
FAR Problem 06
03. BS DATE M
03. BS DATE MEASUREMENT

DEPRECIATION
DEPRECIATION

Rate does not change each year

(even when RETIRING an asset)

Rate changes only when an asset

is REPLACED

Replacing an asset affects

EUL. Retiring does not.
FAR Problem 07
FAR Problem 07
 FAR Problem 08

SYD
Focus on depreciable cost (Original cost
less salvage value)
→ does not change unless stated

DBR
Focus on current CV (changes each year)
→ note that current CV ignores
salvagable value but is net of
accumulated dep.
FAR Problem 08

"Current & Prospective" If double declining bal. is used:

Current CV will be subject to DBR = 1/RUL x rate
NEW POLICY = 1/3 x 2
= 0.6667

CV x DBR
= 1,550M x 0.6667
= 1,033,333.33
DepExp for 2022
04. WASTING

If asset is unexp
undeveloped
Go through PAS
16
04. WASTING ASSET

If asset is unexplored and Tangible E&E Asset Purpose of exploratio

undeveloped Physical asset to be used costs
Go through PAS 6 before PAS more than one period TO ESTABLISH TEC
16 FEASIBILITY

Wasting Asset
No depreciation but tested
for possible impairment

E&E Asset
Incurs NO EXPENSE unless
IMPAIRED after testing for
impairment
Purpose of exploration and evaluation Nothing is thrown away or If the asset's own RU
costs wasted than the Wasting As
TO ESTABLISH TECHNICAL All will eventually transfer Use STRAIGHT LIN
FEASIBILITY to the wasting asset
account
If the asset's own RUL is shorter based on REMAINING useful life
than the Wasting Asset (WA) (RUL)c
Use STRAIGHT LINE METHOD
FAR Problem 09
FAR Problem 09

"Purchased new equipment

@1.5M
Separable cost from the WA Total depletion?
ACTUAL OUTPUT
Depreciation Depletion Expense?
WA EUL shorter TOTAL SALE
→ OUTPUT METHOD
Intangible Asset EUL shorter
→ STRAIGHT-LINE
 If the asset's own RU
than the Wasting As
Use STRAIGHT LIN

In this problem, since OUTPUT = SALES, then

DEPLETION = DEPLETION EXPENSE

What is WA EUL is s
intangible asset?
Output method rate
Depreciable cost ove

[1,350M / 1M] x 60,

If the asset's own RUL is shorter based on REMAINING useful life
than the Wasting Asset (WA) (RUL)
Use STRAIGHT LINE METHOD

What is WA EUL is shorter than EUL of Note

intangible asset? OUTPUT method is NOT AFFECTED by the
Output method rate x OUTPUT: PASSAGE OF TIME
Depreciable cost over estimated output
Hence why output method is not multiplied
[1,350M / 1M] x 60,000 TONS by 7/12
Output method RATE
Depreciable CV / Output RUL
 05. IMPAIRME

2:57
05. IMPAIRMENT
 FAR Problem 10

Assets automatically tested Why is RV higher between VIU Once Goodwill is imp
for impairment? and FVLCTS? can NEVER be recov
Assets not amortized or You own the asset, so
depreciated annually maximize its value

Why is PPE not

AUTOMATICALLY tested for
impairment
Too costly
FAR Problem 10

Once Goodwill is impaired, it

can NEVER be recovered
06. FAR THEO

Proceeds from s
preparing an as
purpose
Treat as INCOM
No effect on the
(previously trea
amended to hav
06. FAR THEORIES

Land for plant site

PPE
Land for RENTAL
Investment Property

Proceeds from selling produce from

preparing an asset for its intended
purpose
Treat as INCOME
No effect on the cost of the asset
(previously treated as a deduction, then
amended to having no effect)
 When the depreciable improvement is
included in the blueprint
Charge to BUILDING

Property Taxes (IN ARREARS)

Capitalizable to the cost (which
indirectly pays the unpaid
taxes, so makes sense)
Payments for vacating premises
Only for the buidling
"Encumbrances"
Unpaid amounts
Special Assessments for local
improvement
PERMANENT improvements
Related Party
can excert SIGNIFICA
INFLUENCE
Related Party What is shareholder has NO
can excert SIGNIFICANT SIGNIFICANT INFLUENCE?
INFLUENCE NOT a related party—add to deferred
income

"whichever is lower"
Capitalizable BC cannot be
higher than actual
borrowings
07. AUDIT PR
07. AUDIT PRACTICE

First encounter of non-

routinary process
Item A
Segragation of dutie
should be treasury—
controller

Item B
Departmnet in need
→ REQUISITIONING
Department making
→ PURCHASING
Item A
Segragation of duties. Signing
should be treasury—not the
controller

Item B
Departmnet in need of PPE
→ REQUISITIONING
Department making the purchase
→ PURCHASING
PPE = less transactions Complete Review First time audit
Usually SUBSTANTIVE Test of controls Check opening and current-year
TESTING balances

More transactions Continuing audit

ToC before ST (unless risk is Check current-year balances only
high)
Why vouch when assertion is completeness
(vouching is usually EXISTENCE ASSERTION for
OVERSTATEMENTS)
The EXPENSE is being vouched
Expense = possible UNDERSTATEMENT
Understatement = COMPLETENESS
Assets = VOUCHED

Vouching = Asset (usually existence)

Tracing = Liab. & Expenses (usually completeness)
Capitalize
Increase in the asse
→ existence assertio
Capitalize
Increase in the asset
→ existence assertion
Vouching (Existence)
Records to physical
→ overstatement of records

Tracing (Completeness)
Physical to records
→ understatement of assets
Long EUL
Shorter depreciation
If actual UL is less th
recurring losses wou
depreciation is still r
EUL should've been

Example:
Correct EUL: 5
EUL used: 10 years

Longer EUL = shorte

(UNDERSTATED EXP

After 5 years, deprec

occur. But since 10 E
5, then recurring los
more dep. expenses
Long EUL
Shorter depreciation exp.
If actual UL is less than estimated UL, then
recurring losses would occur where
depreciation is still recognized when the
EUL should've been over

Example:
Correct EUL: 5
EUL used: 10 years

Longer EUL = shorter dep. exp.

(UNDERSTATED EXP.)

After 5 years, depreciation exp. should not

occur. But since 10 EUL was used instead of
5, then recurring losses by recognizing
more dep. expenses will occur.
AudProb Problem 01
09. SUBSEQUENT COSTS AFTER INITIAL RECOGNITION
ECOGNITION
10. IMPAIRMENT OF CGU
 11. APPRAISAL MODEL

Recycling not allowed

RS - OCI transferred to RE

Recycling
If land FVLCTS is @800K, cost model is used, so NO allowed for DEBT Sec.
maximum impairment APPRAISAL when RV > CV Not allowed for EQUITY S
allowed for land is 200K
Land RV > CV, so Land will
not share impairment
11. APPRAISAL MODEL

Recycling not allowed

RS - OCI transferred to RE

Recycling
allowed for DEBT Sec.
Not allowed for EQUITY Sec.
When FV > CV under COST MOD
only recognize UP TO CV HAD T
BEEN NO IMPAIRMENT
When FV > CV under COST MODEL
only recognize UP TO CV HAD THERE
BEEN NO IMPAIRMENT
1:14:01