You are on page 1of 14

Auditing &

Investigations II

Audit of Receivables
Key issues

 Introduction to audit of

 Audit procedures for

1. Introduction
 Receivable tend to be material figure on
company’s Statement of Financial

 Receivables tend to be audited in

conjunction with sales

 The auditor need to diligent with

standard procedures such as

 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
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
 Reading correspondence with
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).
 Receivablesmust be presented
“grossed up” (ie, all credit
balances are eliminated and
disclosed under payables

 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

o amounts falling due to be collected

within one year, and

o amounts falling due to be collected

after one year.
Substantive tests on accounts
 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.
 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
 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.

Thank you for

your attention