CHAPTER 14*RECEIVABLES*

PRESENTED BY:Arsalan Khan

Introduction Receivables are audited using

Test of details Analytical procedures

3 main assertions applies to receivables are…

Assertions about classes of transaction

Occurrence Completeness Accuracy Cut off classification

Assertions about account balances at the period end

Existence Rights and obligations Completeness Valuation and allocation

Assertion about presentation and disclosure

Occurrence, rights and obligations Completeness Classification and understandability Accuracy and valuation

Audit Procedures For Receivables Existence, Completeness & Valuation are key Assertions Receivables are often tested in conjunction with sales Occurrence, Completeness & Accuracy are key assertions for

sales

Audit Plan : ReceivablesCompleteness

Agree the balance from the individual sales ledger accounts to the

aged receivables’ listing and vice versa.

Match the total of the aged receivables Cast and cross-cast the aged trial balance Trace a sample of shipping documentation Complete the disclosure checklist Compare the gross profit % Compare the level of prepayments Review detailed statement of financial position

Existence

Perform a receivables’ circularisation on a sample of year-end Follow up all balance disagreements and non-replies to thereceivables’ confirmation. Perform alternative procedures, such as: Review after-date cash receipts by inspecting bank

statementsand cash receipts documentation. Examine the customer’s account and customer

correspondence

Examine the underlying documentation Inquire from management explanations for invoices remainingunpaid. Observe whether the balance on the account is growing and if

so, find out why by discussing with management.

Rights & Obligations

Review bank confirmation for any liens on receivables.

Make inquiries of management, review loan agreements andreview board minutes for any evidence of receivables being sold

Valuation & Allocation

Compare receivables’ turnover and receivables’ days to theprevious year Compare the aged analysis of receivables from the aged trialbalance to the previous year. Review the adequacy of the allowance for uncollectable accountsthrough discussion with management. Compare the bad debt expense as a % of sales to the previous year Compare the allowance for uncollectable accounts as a % ofreceivables or credit sales to the previous year

Confirm adequacy of allowance by reviewing correspondence withcustomers and solicitors. Examine credit notes issued after year-end for allowances thatshould be made against current period balances. Examine large customer accounts individually and compare to theprevious year’s balances. For a sample of old debts on the aged trial balance, obtain furtherinformation regarding their recoverability For a sample of prepayments from the prepayments’ listing,recalculate the amount prepaid to ensure that it has beenaccurately calculated.

Cut-Off

For a sample of sales invoices around the year-end, inspect thedates. For sales returns, select a sample of returns documentation

around the year-end Perform analytical procedures on sales returns, comparing theratio of sales returns to sales. Review material after-date invoices, credit notes and

adjustmentsand ensure that they are recorded correctly in the relevant financialperiod

Classification

Take a sample of sales invoices and examine for properclassification into revenue accounts.

Accuracy

For a sample of sales invoices, compare the prices and terms tothe authorised price list and terms of trade documentation. Test whether discounts have been properly applied byrecalculating them for a sample of invoices. Test the correct calculation of tax on a sample of invoices.

Occurrence

For a sample of sales transactions recorded in the ledger, vouchthe sales invoice back to customer orders and dispatchdocumentation.

Occurrence & Rights & Obligations

Determine, through discussion with management, whether any

receivables have been pledged, assigned or discounted and

whether such items require disclosure in the financial statements.

Classification & Understandability

Review the aged analysis of receivables for any large credits, nontrade receivables and long-term receivables and consider whether such items require separate disclosure.

Read the disclosure notes relevant to receivables in the draft financial statements and review for understandability.

Accuracy & Valuation

Read the disclosure notes to ensure the information is accurateand properly presented at the appropriate amounts.

The Receivables confirmation

A confirmation of receivables is a major procedure, usually achieved by direct contact with customers. There are two methods of

confirmation: positive and negative.

Objectives of confirmation Verification of trade receivables by confirmation is a normal mean

of audit evidence. Whether customers exist and owe bona fide amounts to the

company? Prima facie The confirmation of receivables on a test basis should not be

regarded as replacing other normal audit tests, such as the testing in-depth of sales transactions, but the results may influence the scope of such tests

Client's mandate

Confirmation is essentially an act of the client, who alone can authorise third parties to divulge information to the auditors.

What the auditors' response should be when management refuses permission for the auditors to contact third parties for evidence?

Auditor should inquire the management’s reasons for refusal. If the refusal is unreasonable then auditor shall communicate with

those charged with governance in accordance with ISA 260.

Positive vs negative confirmation

A positive confirmation request is one in which the confirming party responds directly to the auditor indicating whether they agree or disagree with the information in the request or provides the requested information.

A negative confirmation request is one in which the confirming party responds directly to the auditor only if they disagree with the information in the request.

Continued… The negative method provides less persuasive audit evidence and

shall not be used as the sole substantive procedure to audit receivables unless all of the following are present:

Low Risk Controlshomogeneous

account balances

Low exception Rate

Sample selectionFollowing classes of account should receive special attention:

Old Accounts

Accounts written-off

Accounts with Credit Balances

Round Sum Payments

Nil Balances

Paid( by the date of

examination)

Follow-up Procedures

The auditor may send an additional conformation request when a reply to a previous request has not been received within a reasonable time.

Exceptions non-response

In the case of non-responses, the auditor shall perform alternative audit procedures to obtain relevant and reliable audit evidence.

Reliability Of Responses

If the auditor concludes that a response to a request is not reliable, he shall evaluate the impact of this on the assessment of the risk of material misstatement (including the risk of fraud)

Sales Comprises a material figure in the statement of comprehensive

income Auditors obtain that sales are pertain to the entity, and are

completely and accurately recorded

Completeness And Occurrence Of Sales

Analytical review is important when testing completeness Auditors should consider the following