ACCOUNT RECEIVABLE AUDIT

I.TRANSACTIONS AND ACCOUNT BALANCE ASSERTION

Transactions & Events: (IS)

1. Occurrence
2. Completeness
3. Accuracy
4. Cut-off
5. Classification

Account Balances

1. Existence
2. Rights & Obligations
3. Completeness
4. Valuation & Allocation

 

Completeness- all transactions, assets, liabilities and equity interests have been recorded that should have been recorded.

Accuracy- amounts, data and other information have been recorded and disclosed appropriately.

Cut-off- transactions and events have been recorded in the correct accounting period.

Classification and understandability- transactions and events have been recorded in the proper accounts, and described and disclosed clearly.

Existence- assets, liabilities and equity interests exist.

Rights and obligations- the entity holds or controls the rights to assets and liabilities are the obligations of the entity.

Valuation and allocation- assets, liabilities and equity interests are included in the financial statements at appropriate values.

II.AUDIT PROCEDURE FOR TRADE RECEIVABLES

In order to verify the figure in the financial statements for receivables the auditor would perform a number of substantive procedures as outlined below.

Control account:

List of receivable balance in the sales ledger agree the total with control account.

Year-end receivable account balance:

• Aged debt listing and overdue debts ( allowance for doubtful debts)
• Check the authorisation for debt written off
• Check contra entries made to net off account receivable and account payable.
• Check that the balance are made up of specific invoices
• Direct confirmation/ circularisation
• Review the individual accounts of major customers.
• Review and test the year end cut-off procedures.

Analytical Procedure:

• A comparison of receivable day ratio (receivables/sales x 365) with budget and /or prior years, also with similar companies.
• A comparison of the proportion of the debts in different age band to prior years.

Old debts may indicate either poor or deteriorating economic condition or credit control.

Irrecoverable Debts:

Audit procedures includes as follows.

• Previous irrecoverable debt experiences
• Receivables’ circularisation/confirmation
• Aged analysis of receivable
• Events after the reporting period

Returns inwards and Credit Notes:

From an audit point of view the major problems is likely to be the issue of a substantial volume of credit notes after the year end.

Note: In practice, each customer may be checked by internal auditors even some customers are not audited today but next time they are audited.

III. PRACTICAL DOCUMENTS FOR TRADE RECEIVABLE AUDIT

• Customer order
• Sale order
• Delivery note to customer
• Official invoice
• Credit note
• Official receipt
• Contracts with customers
• Daily cash report
• Bank statement and bank reconciliation etc.

Practical Question

Recently Gold Trading Group Co faces problem of controlling trade receivable after financial manager resigned.

List of Individual trade receivable as follows:

ABC	10,000
Top Trade	5,000
Premium Group	2,000
XZY	20,000
Trading Co	3,000
AZC Group	7,000
ATB	9,000
OTC Co	300
AQZ	6,000
TYU	15,000
Total	77,300

 

Required:

You are required to make audit procedure to audit account receivable above based on your professional judgment.

Answer 

• sample size ( risk assessment ) : 7 customers/7 AR
• How to select sample
• Request record/soft of data
• Request hard accounting documents ( invoice, receipt, delivery note, sale order etc.)
• Bank statement
• Audit procedures:

+invoice/receipt compare with record : inspection

+ confirm balance with customer

+ sum each of AR with total AR ( recalculation)

 

Summary of Account Receivable Audit

1. List of Individual AR & Control Account of AR: AR, Mr.1 + AR, Mr.2 + AR, Mr.3+…….+AR, Mr.100 = Total AR ( Balance sheet)
2. Audit scope
3. Determine Sample Size / Population
4. How to select sample  : random  , judgment
5. Request Soft Journal/transaction Record/General Ledger
6. Hard Accounting Documents
7. Bank Statement
8. Audit procedures (7 points): inspection, recalculation, confirmation  etc.