Question

G) The credit controller of Fashion Designers Ltd has provided you with an aged debtor’s trial balance as at 30 November 1993. There are over 5000 individual accounts distributed over a wide range of values. The system of internal control over debtors has been assessed as satisfactory and reliable.
1) What audit objectives would you be concerned with in testing the trade debtor’s balance?
2) Describe the steps that you would include in an audit program to test the trade debtors balance as at 30 November 1993.
3) What further testing would you perform as at year end?
4) What analytical review procedures could be used to examine the possible overstatement or understatement of the provision for doubtful debts?

Answer 1

Accounts receivable is frequently the largest asset in the Financials of a company. Hence, it is wise to spend a considerable amount of time gaining assurance that the amount of the stated asset is reasonable.

Audit Objectives:

• To obtain reasonable assurance that the financial statements are free of material misstatements to the extent concerned with Account receivable balances; and
• To issue a report on those financial statements based on the findings resulting from the audit.
• That all the receivables exists.
• That recorded receivable balances are accurate
• That the derivation of the allowance for doubtful accounts properly reflects bad debt experience
• That sales transactions were processed in the correct periods
• That revenue was appropriately recognized

Audit steps and procedures:

Here are some of the accounts receivable audit procedures that might be followed:

1. Trace receivable report to general ledger. The auditors shall ask for a period-end accounts receivable aging report, from which they trace the grand total to the amount in the accounts receivable account in the general ledger. (If these totals do not match, the Financials may have a journal entry somewhere in the general ledger account that should not be there)
2. Investigate reconciling items. If you have journal entries in the accounts receivable account in the general ledger, the auditors will likely want to review the justification for the larger amounts. This means that these journal entries should be fully documented.
3. Test invoices listed in receivable report. The auditors will select some invoices from the accounts receivable aging report and compare them to supporting documentation to see if they were billed in the correct amounts, to the correct customers, and on the correct dates.
4. Match invoices to shipping log. The auditors will match invoice dates to the shipment dates for those items in the shipping log, to see if sales are being recorded in the correct accounting period. This can include an examination of invoices issued after the period being audited, to see if they should have been included in a prior period.
5. Assess bill and hold sales. If you have situations where you are billing customers for sales despite still retaining the goods on-site (known as "bill and hold"), the auditors will examine your supporting documentation to determine whether a sale has actually taken place.
6. Related party receivables. If there are any related party receivables, the auditors may review them for collectability, as well as whether they should instead be recorded as wages or dividends, and whether they were properly authorized.

Year End Audit procedures may include below steps:

1. Confirm accounts receivable. A major auditor activity is to contact your customers directly and ask them to confirm the amounts of unpaid accounts receivable as of the end of the reporting period they are auditing. This is primarily for larger account balances, but may include a few random customers having smaller outstanding invoices.
2. Review receiving log. The auditors will review the receiving log to see if it records an inordinately large amount of customer returns after the audit period, which would suggest that the company may have shipped more goods near the end of the audit period than customers had authorized.

Audit steps to identify Understatement or Overstatement of Accounts receivable:

1. Assess the allowance for doubtful accounts. The auditors will review the process that you follow to derive an allowance for doubtful accounts. This will include a consistency comparison with the method used in the last year, and a determination of whether the method is appropriate for your business environment.
2. Assess bad debt write-offs. The auditors will compare the proportion of bad debt expense to sales for this year in comparison to prior years, to see if the current expense appears reasonable.