Auditing & Investigations II Audit of Receivables

Introduction to audit of receivables Key issues Introduction to audit of receivables Audit procedures for Receivables

1. Introduction Receivable tend to be material figure on company’s Statement of Financial Position. Receivables tend to be audited in conjunction with sales The auditor need to diligent with standard procedures such as ‘confirmations’. The receivables confirmation is primarily designed to test the client's entitlement to receive the debt, not the customer's ability to pay.

Key inventory assertions Occurrence Completeness Accuracy Cut off Classification

Tests relating to ownership and existence Audit Procedures Debtors’ circularisation. Examination of balances and post balance sheet date settlements which confirm that the debt did exist at the balance sheet date. Good credit control procedures over receivables ledger eg, agreement of control accounts, debt recovery procedures. Reading correspondence with debtors.

Tests relating to valuation Audit Procedures Reviewing and testing the calculation of any general allowance for doubtful debts. Analytical review procedures: examining income analyses, comparative figures for sales and receivables, and key ratios (eg, gross profit, quick assets and receivables collection period).

Tests relating to presentation Audit Procedures Receivables should be presented at net realisable value (ie, net of any allowance for doubtful debts). Receivables must be presented “grossed up” (ie, all credit balances are eliminated and disclosed under payables instead).

Continued Accounts receivable must be disclosed under current assets as a separate “format line”. IAS 1, however, requires the total figure of receivables to be analysed in a note between: amounts falling due to be collected within one year, and amounts falling due to be collected after one year.

Substantive tests on accounts receivable Examining a sample from the receivables ledger with an “aged” list of balances, noting the composition of the debt and whether it has been paid after the balance sheet date. Checking casts and agreeing the total with control account balances. Verifying “cut-off” procedures and the allowance for credit notes and/or accrual for sales invoiced late. Vouching bad debt write-offs with suitable authority.

Continued Reviewing bad debt policy for consistency with previous years. Examining a sample of bad debts in light of the allowance in order to determine that the policy has been complied with. Reviewing any significant balances that are in arrears but have not been regarded as bad debts. Investigating any significant credit balances to establish the cause. Note any instances of missing invoices and draw management’s attention thereto.

Analytical review Significant ratios (eg, gross profit/sales, current assets/current liabilities, quick assets/current liabilities, receivables in terms of a week’s sales). Budgets for the year under review and subsequent years - note variances and causes. Comparative figures – establish the principal reason for any variations. Interim accounts for the succeeding period, noting collection of debts, sales and profit record, continuance of “going concern” status.

Debtors’ circularisation A debtors’ circularisation involves selecting a sample of receivable balances from the client’s ledger and, after obtaining the client’s permission, writing direct to the customer (the debtor) in order to confirm that the balance is correct.

Additional Procedures Second letter if no reply is received. Use other methods of verifying the debt, such as matching to cash receipts or verifying that the sale has taken place by matching invoices to signed delivery notes. Investigate differences between the client’s sales ledger balance and the customer balance. Such differences normally arise because of cash or invoices in transit, but may also stem from miscellaneous causes such as an unrecorded discount.

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