Receivable Part 2

Question 1

10 jan

Answer 1

When auditing receivables, the auditor selects a sample of customers to confirm their account balances. Here’s a detailed process for sample selection and performing the confirmation exercise:

1. Obtain or Prepare an Aged Listing:
- Audit Step: Obtain or prepare an aged listing of receivables ledger balances at the chosen date.
- Example: Create a list showing receivables aged by 30, 60, 90 days, etc.

2. Check Completeness and Accuracy:
- Audit Step: Verify the completeness and accuracy of the list of balances.
- Example: Compare the total balance on the list with the trade receivables control account in the main ledger and a sample of individual customer balances.

3. Choose a Suitable Sampling Method:
- Audit Step: Select a sampling method to ensure the sample is representative of the receivables population.
- Example: Use random sampling or systematic sampling (e.g., every 10th account).

4. Use Stratified Sampling if Necessary:
- Audit Step: If the receivables population is not homogeneous, use stratified sampling.
- Example: Separate receivables into strata such as overdue accounts, credit balances, and material balances.

5. Consider Specific Types of Accounts:
- Audit Step: Include specific types of accounts in the sample.
- Example:
- Overdue accounts
- Credit balances or negative balances
- Accounts with round sum payments (e.g., Rs.5,000, Rs.10,000)
- Nil balances
- Material individual balances

6. Use Audit Software:
- Audit Step: Use audit software to help select the sample.
- Example: Select every 500th Rupee for sampling or all balances over a certain amount.

7. Extract Details and Prepare Letters:
- Audit Step: Extract details from the receivables ledger and prepare confirmation letters.
- Example: Prepare letters with customer names, addresses, and account balances.

8. Issue Confirmation Requests:
- Audit Step: Send confirmation requests issued by the auditor, not the client.
- Example: Include management’s authorization for customers to disclose information directly to the auditor.

9. Handle Refusals:
- Audit Step: If the client refuses to allow a confirmation letter to be sent, investigate the reason and perform alternative audit work.
- Example: Verify the customer balance through other means, such as reviewing subsequent cash receipts.

10. Send Letters by Post:
- Audit Step: Send the confirmation letters by post.
- Example: Ensure letters are sent to the correct addresses and include return instructions.

11. Follow-Up Procedures:
- Audit Step: If no reply is received within a reasonable period, initiate follow-up procedures.
- Example: Send second and third request letters or ask the client to contact the customer for a reply.

Scenario:
ABC Ltd. has a trade receivables balance of $500,000. The auditor needs to select a sample and perform the confirmation exercise.

Steps:

1. Obtain Aged Listing:
   
   • Audit Step: Prepare an aged listing of receivables.
   • Example: List receivables aged by 30, 60, 90 days.
2. Check Completeness and Accuracy:
   
   • Audit Step: Verify the list against the control account and individual balances.
   • Example: Ensure the total on the list matches the control account balance of $500,000.
3. Choose Sampling Method:
   
   • Audit Step: Use systematic sampling.
   • Example: Select every 10th account from the list.
4. Use Stratified Sampling:
   
   • Audit Step: Separate receivables into strata.
   • Example: Create strata for overdue accounts, credit balances, and material balances.
5. Consider Specific Accounts:
   
   • Audit Step: Include overdue and material balances.
   • Example: Select accounts with balances over $10,000 and those overdue by more than 90 days.
6. Use Audit Software:
   
   • Audit Step: Use software to select the sample.
   • Example: Select every 500th Rupee for sampling.
7. Extract Details and Prepare Letters:
   
   • Audit Step: Prepare confirmation letters.
   • Example: Include customer names, addresses, and balances.
8. Issue Confirmation Requests:
   
   • Audit Step: Send letters with management’s authorization.
   • Example: “Dear Customer, please confirm your balance of $10,000 as of December 31, 2024.”
9. Handle Refusals:
   
   • Audit Step: Investigate reasons for refusal and perform alternative procedures.
   • Example: Verify the balance through subsequent cash receipts.
10. Send Letters by Post:
    
    • Audit Step: Ensure letters are sent correctly.
    • Example: Send letters to the correct addresses with return instructions.
11. Follow-Up Procedures:
    
    • Audit Step: Send reminders for non-responses.
    • Example: Send a second request letter after two weeks.

By following these steps, auditors can effectively select a sample and perform the confirmation exercise, ensuring reliable audit evidence for trade receivables. If you have any more questions or need further clarification, feel free to ask! 😊

Upon receiving replies from customers, the auditor should follow these steps to ensure the accuracy and reliability of the receivables balances:

1. Check Signatures:
- Audit Step: Verify that the replies are signed by a responsible official.
- Objective: Ensure the authenticity of the responses.
- Example: Check that the reply from Customer A is signed by their financial director.

2. File Replies:
- Audit Step: File the replies in the receivables section of the current audit file.
- Objective: Maintain organized records for audit documentation.

3. Classify Customer Responses:
- Audit Step: Classify the customers in the sample based on their responses.
- Categories:
- Balance Agreed: Customer agrees with the balance.
- Balance Not Agreed: Customer disagrees with the balance.
- No Reply Received: No response from the customer.

1. Balance Agreed:
- Audit Step: No further audit work is required.
- Example: Customer B confirms their balance of $5,000 matches the client’s records.

2. Balance Not Agreed:
- Audit Step: Ask the client to review the replies and reconcile the differences.
- Objective: Identify and resolve any discrepancies.
- Example: Customer C disputes a balance of $10,000, claiming it should be $9,500. The client reviews the records and finds a timing difference due to a recent payment not yet recorded.

3. No Reply Received:
- Audit Step: Perform alternative procedures to obtain evidence for the customer’s balance.
- Objective: Ensure the accuracy of the balances for all accounts in the sample.

1. Subsequent Payments:
- Audit Step: Check if the customer has subsequently paid the amount due.
- Objective: Validate the receivable.
- Example: Customer D did not reply, but a payment of $3,000 was received after the confirmation date, confirming the balance.

2. Examine Supporting Documentation:
- Audit Step: Review relevant documentation for outstanding invoices.
- Objective: Verify the validity of the receivable.
- Example: For each outstanding invoice, examine:
- Signed Customer Purchase Order: Ensure the order was placed by the customer.
- Signed Delivery Documentation: Verify the customer’s signature on the delivery note.
- Sales Invoice: Confirm the invoice was addressed to the customer.

By following these procedures, auditors can ensure the accuracy and reliability of receivables balances, providing assurance to stakeholders. If you have any more questions or need further clarification, feel free to ask! 😊

After completing the confirmation exercise, the auditor should summarize the responses and draw conclusions about the receivables balances. Here’s how to prepare the summary and reach a conclusion:

1. Summarize Responses:
- Audit Step: Produce a summary of the responses received from customers.
- Objective: Clearly indicate the amounts for which supporting evidence has not been established, highlighting potential misstatements.

2. Classify Responses:
- Categories:
- Replies Received and Agreed: Customers agree with the balance.
- Replies Received and Reconciled: Customers initially disagreed, but the balances were reconciled.
- Non-Replies Agreed Using Alternative Procedures: No reply received, but alternative procedures confirmed the balance.
- Balances Still Unresolved: No reply received, and alternative procedures did not confirm the balance.

3. Calculate Percentages:
- Audit Step: Calculate the percentage of the total receivables for each category.
- Objective: Understand the distribution of responses and unresolved balances.

4. Extrapolate Potential Error:
- Audit Step: Extrapolate the potential error to the total population of receivables.
- Objective: Estimate the likely level of misstatement in the total receivables balance.

Here’s an example of how the summary might be prepared:

Total Value of Receivables: Rs. 1,248,900

Extrapolation of Potential Error:
- Calculation: Rs. 1,248,900 × 2.5% = Rs. 31,222
- Action: Transfer this amount to the cumulative errors schedule.

The cumulative errors schedule is a list of items where the auditor’s view of the amount differs from the client’s accounting records or draft financial statements. The auditor builds this schedule throughout the audit and uses it to reach the final audit opinion.

By preparing this summary and extrapolating potential errors, the auditor can assess the likely level of misstatement in the receivables balances and determine whether it is material. This process helps ensure the accuracy and reliability of the financial statements.

If you have any more questions or need further clarification, feel free to ask! 😊

In addition to the confirmation process, auditors should perform several other audit procedures to ensure the accuracy and reliability of trade receivables. Here are some key procedures:

The auditor needs to be satisfied that the amount of irrecoverable receivables written off and any allowance made for doubtful receivables are reliable. These affect the amount included in the statement of financial position for trade receivables. The following substantive procedures should be performed:

1. Review Company Procedures:
   
   • Audit Step: Review the company’s procedures for identifying irrecoverable and doubtful receivables.
   • Objective: Ensure the procedures are robust and consistently applied.
   • Example: Check the criteria used by the company to classify receivables as doubtful or irrecoverable.
2. Review Aged Listings:
   
   • Audit Step: Review aged listings of receivables balances.
   • Objective: Identify overdue accounts and assess their collectability.
   • Example: Examine the aged receivables list to identify accounts overdue by more than 90 days.
3. Review Correspondence:
   
   • Audit Step: Review correspondence with customers, lawyers, and collection agencies.
   • Objective: Assess the likelihood of collecting unpaid or disputed debts.
   • Example: Check emails and letters related to collection efforts for overdue accounts.
4. Review Assumptions:
   
   • Audit Step: Review the assumptions used for calculating allowances against doubtful receivables.
   • Objective: Ensure the assumptions are reasonable and based on historical data.
   • Example: Verify the percentage used to estimate doubtful receivables is consistent with past experience.
5. Check Subsequent Clearance:
   
   • Audit Step: Check if overdue receivables have been subsequently cleared.
   • Objective: Confirm the validity of receivables.
   • Example: Verify that payments received after the year-end match the outstanding receivables.

To satisfy the classification and presentation assertion, the auditor needs to ensure that:

1. Agree Receivables Ledger Balances:
   
   • Audit Step: Ensure the list of receivables ledger balances agrees with the financial statements.
   • Objective: Confirm the completeness and accuracy of the receivables balances.
   • Example: Compare the total receivables balance in the ledger with the amount reported in the financial statements.
2. Correct Classification and Presentation:
   
   • Audit Step: Ensure receivables are correctly classified and presented in the financial statements.
   • Objective: Verify that receivables are appropriately categorized and disclosed.
   • Example: Check that trade receivables are not incorrectly classified as other receivables or prepayments.

Scenario:
ABC Ltd. has a trade receivables balance of $500,000. The auditor needs to perform additional procedures to verify the accuracy of this balance.

Steps:

1. Review Company Procedures:
   
   • Audit Step: Examine ABC Ltd.’s policy for identifying doubtful receivables.
   • Example: Ensure the policy includes criteria such as aging, customer creditworthiness, and historical payment patterns.
2. Review Aged Listings:
   
   • Audit Step: Analyze the aged receivables list.
   • Example: Identify accounts overdue by more than 90 days and assess their collectability.
3. Review Correspondence:
   
   • Audit Step: Check correspondence related to overdue accounts.
   • Example: Review emails and letters from collection agencies regarding efforts to collect overdue amounts.
4. Review Assumptions:
   
   • Audit Step: Evaluate the assumptions used for calculating allowances.
   • Example: Verify that the allowance for doubtful receivables is based on a reasonable percentage of overdue accounts.
5. Check Subsequent Clearance:
   
   • Audit Step: Verify subsequent payments.
   • Example: Confirm that payments received after the year-end match the outstanding receivables.
6. Agree Receivables Ledger Balances:
   
   • Audit Step: Compare the receivables ledger with the financial statements.
   • Example: Ensure the total receivables balance in the ledger matches the amount reported in the financial statements.
7. Correct Classification and Presentation:
   
   • Audit Step: Verify the classification and presentation of receivables.
   • Example: Check that trade receivables are correctly classified and disclosed in the financial statements.

By performing these additional audit procedures, auditors can ensure the accuracy and reliability of trade receivables, providing assurance to stakeholders. If you have any more questions or need further clarification, feel free to ask! 😊

Value of Balances | % of Total |
|——————-|————|
| Replies Received and Agreed | Rs. 465,600 | 80.3% |
| Replies Received and Reconciled | Rs. 56,400 | 9.7% |
| Non-Replies Agreed Using Alternative Procedures | Rs. 43,200 | 7.5% |
| Balances Still Unresolved | Rs. 14,300 | 2.5% |
| Total | Rs. 579,500 | 100% |