Question

15-29 (OBJECTIVES 15-2, 15-3) Fastjet Airlines Limited is a low-cost airline. Fastjet commenced operations in November 2017 and is looking to expand both its customer base and destinations. In conducting your audit, you are unsure how Fastjet will be able to manage its credit issuance and collections. Select information from the company’s 2018 and 2019 annual reports is shown below (in thousands of US dollars):

	year ended 12/31/18	year ended 12/31/19
sales	26,117	53,759
not past due	164	0
0-60 days past due(allowance)	1,111(72	2,975(542)
more than 60 days(allowance)	235(28)	0
total trade receivables	1,510	2,975
total allowance	100	542

Required

a. Based on the information provided, a list which analytical procedures you can use to determine whether trade receivables and the allowance for doubtful receivables are accurately reported.

b. What additional information is needed to conduct more detailed analytical procedures related to receivables and allowance for doubtful accounts?

c. What is your conclusion regarding the accuracy of Fastjet’s trade receivables and allowance for doubtful receivables as on December 31, 2019?

Answer 1

a. List of analytical procedures:

• Compare the accounts receivables report with the amount given in the balance sheet to identify that the correct amount has passed onto the balance sheet.
• Verify the total of all the ledger balances included in the accounts receivable report to ensure the correct total has been included in the balance sheet.
• Identify a sample of debtors (Top 10 debtors, mix of top, median and low debtors) and ask for confirmations from the debtors, that is, to ensure that the correct customer balances are reflected.
• Identify a sample of debtors (ideally, debtors with top 10 balances) and verify if the balances are correctly aged/included in the correct aging bracket.
• Identify a sample of ledgers and verify if the invoice date and the credit period allowed are correctly incorporated to ensure correct classification between due and past due.
• Identify debtors with amounts due for an exceptional period (say more than 150 days), confirm if these are disputed.
• Compare the recievable days (Trade Receivables/Sales) on an year on year basis to identify any steep movements.
• Compare the % of allowance over total receivables and identify any steep increase and falls. In case of changes, ask the management for reasons in changes in allowance policy and if the same has been authorized by higher management.
• Check for any goods dispatched right before year end and right after year end to ensure that they have been correctly included in the correct accounting period.
• Check for cash received right before year and right after year end to ensure that the recivables balance has been correctly adjusted in the right accounting period.
• Check for credit notes and debit notes issued during the year and verify if their effects have been correctly accounted for in the accounts receivable.
• For a sample of debtors, perform a sample check between the amount of sales reflected in the invoice and the amount included in the ledger to ensure correct balances are being posted.

2. Additional information required:

• Customer confirmations
• Invoices of customer
• Goods Dispatched Note
• Approvals from management for changes in allowance policy
• Cash ledger
• Individual receivables ledger

3. For establishing accuracy, we will conduct the following checks:

Particulars	31/12/2018	31/12/2019
Sales	26,117	53,759
Receivables	1,510	2,975
Receivables/Sales (%)	5.78 %	5.55%

As we can see, the receivables % is approximately the same over the 2 periods. This means, overall the funds blocked in credit sales has remained consistent over the years.

Year	Total	Not Due	% over total	Due 0-60 days	% over total	Due >60 days	% over total
31/12/2018	1,510	164	10.9%	1,111	73.6%	234	15.6%
31/12/2019	2,975	0	0%	2,975	100%	0	0%

As we can sse, there has been a decline in customers paying their dues within the credit period in the year 2019 as 100% receivables are due. However there has been an improvement in payments as there are no receivables due for more than 60 days.

Further, the allowance % over receivables remains approximately the same over the two years, as is illustrated below:

Particulars	31/12/2018	31/12/2019
Total Receivables	1,510	2,975
Allowance	100	542
Allowance % over receivables	18.40%	18.22%

In light of the receivables% and allowance % remaining consistent it can be said that the balances provided are accurate