Question

An auditor is unable to confirm a material AR balance. What kind of alternative procedures can she do in this situation? What is the preferred order of available procedures? Why?

Answer 1

First of all for selecting accounts for confirmation below matters should be considered:

• Customers with credit balances
• Large customers over a certain amount.
• Custsmers .with balances in excess of credit limits .
• Customers who have paid later invoices but have not settled earlier invoices.
• Long outstanding balances
• Customers who do not pay against specific invoices but make payments on account in round sums.

If an auditor is unable to confirm the material AR Balance then in this situation following alternative ways to be applied:-

1. Review of subsequent collections
2. Inspection of invoices and delivery notes
3. Analytical procedures on the aging schedule of receivables

Similarly allowance for doubtful accounts should be verified like:-

1. Obtain ageing analysis.
2. Check additions of ageing analysis.
3. Review accuracy of the ageing of balances particularly when payments are made on account.
4. Assess reasonableness of the formula applied for estimating allowance.
5. On a test basis, trace balances from accounts receivable ledger to age analysis.
6. Perform analytical procedures. Compare number of days’ sales this year with last year.
7. Check subsequent collections.
8. Check approval for allowances and write off