Procedure for testing of
existence of account receivable:
In the audit of a
company the auditors will review accounts receivable in
some detail. Accounts receivable is generally the largest asset
that a company has, so auditors tend to spend a considerable amount
of time gaining assurance that the amount of the stated asset is
reasonable. Here are some of the accounts receivable audit
procedures that they may follow:
- Trace receivable report
to general ledger. The auditors will 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, you may have a
journal entry somewhere in the general ledger account that should
not be there)
- Calculate the
receivable report total. The auditors will add up the
invoices on the accounts receivable aging report to verify that the
total they traced to the general ledger is correct.
- 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.
- 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.
- 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.
- Review cash
receipts. If the auditors are unable to confirm
accounts receivable, their backup auditing technique is to verify
that customers have paid the invoices, for which they will want to
review check copies and trace them through your bank account.
- 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.
- 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.
- Review credit
memos. The auditors will review a selection of the
credit memos issued during the audit period to see if they were
properly authorized, whether they were issued in the correct
period, and whether the circumstances of their issuance may
indicate other problems. They may also review credit memos issued
after the period being audited, to see if they relate to
transactions from within the audit period.
- 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.
- Related party
receivables. If there are any related party
receivables, the auditors may review them for collectibility, as
well as whether they should instead be recorded as wages or
dividends, and whether they were properly authorized.
And Verification of Account
receivable is both Substantive procedure & test of control
because
Substantive testing is the detailed
testing of transaction in order to determine Material Misstatement
at assertion level. For this Auditor first performs Test of Control
to determine the operating effectiveness of Controls,When Test of
controls confirm the transactions may be contained Material
Misstatements then Auditor will go Substantive testing to confirm
transactions at detailed level.