TRADE RECEIVABLE Auditing Help

Consider results of tests of controls over sales and receivables.

1. Obtain or prepare a lead schedule of accounts receivable

(a) Trace last year’s balances with last year’s working papers.
(b) Check arithmetical accuracy of the schedule.
(c) Trace totals of the schedule to balance sheet and accounts receivable control account. (Valuation, Completeness)

2. Based on assessed level of risk, decide nature i.e., positive or negative, timing and extent of audit procedures.

(a) Select individual accounts for confirmation
(b) Trace amounts per confirmation requests to accounts receivable ledger
(c) Customers should be requested to reply directly to the auditor.
(d) Confirmation letters should be authorized by the management.
(e) If no reply is received for positive confirmation send a reminder.
(f) Investigate differe~es between amount per books and amount confirmed by the customers.
(g) In case it is expected that customer would not respond or a reply to positive confirmation is not received, apply alternative procedures.
(h) Alternative procedures include verification of subsequent collections, inspection of sales invoices and delivery notes.
(i) If management requests the auditor not to confirm, certain customers, discuss the reasons for such request. If the account is in dispute with the customer, examine available evidence to support management’s’ explanations and perform alternative procedures.
(j) Prepare confirmation statistics setting out number and value of confirmations sent and responses received; sample size;

3.. Re perform adequacy for allowance for doubtful accounts

(a) Obtain aged trial balance of accounts receivable
(b) Check arithmetical accuracy of the schedule
(c) Test aging by verifying amounts in aging classifications for sample of accounts with supporting documents
(d) For past due accounts discuss collectibility with company management and examine credit reports if available, particularly for large outstanding balance.
(e) For past due account also check subsequent collections
(f) Review confirmation differences for indication of amounts in dispute or other indications as to possible uncollectible account
(g) Study correspondence with long outstanding customers.
(h) For doubtful accounts ascertain action taken by management (Valuation)

4. Inspect a sample of trade receivable accounts and vouch from supporting documents

(a) Verify sales from sales invoices and dispatch notes
(b) Verify collections from remittance advises
(c) Test appropriate authorization for adjustments relating to write off and allowances
(d) Agree control account with subsidiary ledger
(e) Obtain explanations for credit balances in customer accounts
(f) Consider indications, if any, for teeming and lading. (Occurrence, accuracy, classification)

5. Carry out cut of tests

(a) Select a sample of sales invoices from sales journal few days before and after year-end and examine supportirg sale invoices and dispatch notes to determine that sales have been record in proper period.
(b) Examine credit notes issued during first week of the subsequent accounting year and examine supporting documents such as goods receiving notes, and determine that the return were recorded in the proper period. This test would also indicate recording of dummy invoices near year end.

6. Perform analytical procedures

(a) Industry experience and trends for receivable turnover.
(b) Sales to receivable ratio
(c) Provision for doubtful accounts to accounts receivable (in total and in relation to past due categories per aging analysis)
(d) Sales to returns and allowances
(e) Ratio of accounts receivable to total current assets (Completeness” valuation)

7. Inspect financial statements to check that accounts receivable have been disclosed, classified and described in accordance with IFRS and comply with statutory requirements.

Points to Note

When accounts receivable are material to the financial statements and when it is reasonable to expect debtors will respond, it is an essential audit procedure to obtain direct confirmation of accounts receivable or individual entries in an account balance.

In this regards the well known case in USA, in 1940 was Maryland Causality Co v Cook. 10 this case the company sued a firm of auditors for losses sustained as a direct result of the negligent work of auditor. The judge held that: “The auditor made no attempt to circularize delinquent accounts outstanding. Certainly, there should have been some attempt at circularization. It would not necessarily have been a 100% circularization. The delinquent accounts should have been canvassed and selected persons contacted either by personal call, by telephone, or by letter.”

Types of Confirmations

Two types of confirmations are used:

(a) Positive confirmation
Positive confirmation requires the customer to respond whether or not they agree with the balance shown is correct.

The confirmation letter may take the following form:

Our records at December 31, 2Ox~ reflect that Rs. 12,867 were due from you. Please confirm whether this _agrees with your records by signing and returning this letter direct to’ our auditors, AB & Co. Chartered Accountants.

Finance manager

The above amount is correct

The above amount is incorrect due 19 following reasons.

Customer

The confirmation request is generally accompanied with a statement of account.

(b) Negative confirmation

In case of negative confirmation, the customer is required to respond , only when he disagrees with the balance Negative, confirmation usually takes the form of a. sticker affixed to statement of account as follows:

Please compare this statement with your books of accounts and advise our auditors AB & Co. Chartered Accountants. P.O. Box 345, Karachi, the discrepancies if any.

Positive form is gener~ly used for large balances and in those cases where the risk is high. Negative confirmation are generally used only when inherent and control risks are low and the amounts involved are relatively small.

Posted on November 3, 2015 in Verification (Substantive Procedures)

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