Lesson 3 AP: Audit of Receivables - Notes

Assertions (OROCAVE)
1. Occurence (Confirm, Aging, Inspection, Analytical Procedures)
2. Rights (Confirm, Aging, Inspection, Analytical Procedures)
3. Obligations (Confirm, Aging, Inspection, Analytical Procedures)
4. Completeness (Analytical Procedures, Cut-Off)
5. Allocation (Aging, Collectibility)
6. Valuation (Aging, Collectibility)
7. Existence (Confirm, Aging, Inspection, Analytical Procedures)

Classification of Receivables
1. Trade Receivables - arise from sale of goods or services
2. Non-trade Receivables - residual definition; includes advances/receivables from officers, 
                              advances to affiliates (usually long-term), advances to supplier (current),
                              subscription receivable collectible within one year (current), 
                              claims receivable (current).

Initial Valuation
*Fair Value (plus directly attributable Transaction Costs)

Subsequent Valuation
*at Amortized Cost
*Accounts Receivable: Amortized Cost=NRV

NRV of Accounts Receivable includes the following deductions:
1. Allowance for freight charge
2. Allowance for sales return
3. Allowance for sales discount (gross or net method)
4. Allowance for doubtful accounts (impairment) (allowance or direct write-off method)

Estimating Doubtful Accounts
1. Aging of Accounts Receivable (gives the ending balance of allowance for doubtful accounts)
2. Percent of Accounts Receivable (gives the ending balance of allowance for doubtful accounts)
3. Percent of Sales (gives the doubtful accounts expense)

Modes of Financing
1. Pledge is a promise attached to a loan. This is part of the general Accounts Receivable and is disclosed.

2. Assignment is a transfer of right to collect. This is part of the specific Accounts Receivable - Assigned account.
     a. Notification Basis
     b. Non-notification Basis

3. Factoring is the sale of receivables. Therefore, there is transfer of ownership. Receivable is derecognized.
     a. Casual Factoring = immediately recognize gain or loss
     b. Continuing Agreement = includes factor's holdback (current asset)

      * In casual factoring, any commission of the factor will be part of loss on factoring.

4. Discounting is the sale of receivable, including interest. There is transfer of ownership.
     a. With Recourse
               *Conditional Sale = Notes receivable discounted is deducted from total notes receivable. 
                                                Note is not derecognized.
               *Secured Borrowing = Note is derecognized. 
                                                Liability for note receivable discounted is recognized.
     b. Without Recourse = Note is derecognized.

*Discount = Maturity Value x Discount Rate x Remaining Term of the Note
*Net Proceeds = Maturity Value - Discount







Impairment
*is the difference between the carrying amount of the loan and the present value of estimated future cash flows discounted at the original effective rate of the loan.

Other Notes:
1. Customer credit balances are current liabilities. The customer paid in excess of his account so it is rightful for the company to return it to the customer.

2. Origination fees received from borrower are recognized as unearned interest income.

3. Direct origination costs are recognized as deferred expense attached to the loan receivable.

4. Amortized Cost of Loan Receivable=Principal - Discount + Premium - Impairement

5. Dishonored notes are removed from notes receivable and transferred to accounts receivable.

 Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards