- This topic has 2 replies, 2 voices, and was last updated 3 years ago by Kim Smith.
August 24, 2019 at 11:59 am #528624vavneetb
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I am gonna ask very silly question but I am so confused,
Substantive procedure for receivables
-Review the reconciliation of the receivables ledger control account( sales ledger account) to the list of sales receivables(sales ledger) balance and invistigate any unusual thing.
For receivables we check overstatement, which one is our source document, sales ledger control account or sales ledger account?August 24, 2019 at 1:44 pm #528645Kim SmithKeymaster
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I think you are getting too “hung up” about over/understatement. We can say, for example:
There is a greater risk of overstatement rather than understatement of trade receivables because, for example:
– revenue may be inflated
– cash receipts might be stolen
– debts might be bad.
That does not mean to say that there is no risk of understatement. Indeed, receivables could be understand – e.g. if revenue is understated (e.g if goods are despatched but not invoiced).
The process for documenting sales/receivables is:
Goods despatch -> Invoice -> Sales day book -> Ledgers -> financial statements
Remember that there is a sales/debtors ledger and the control a/c in the general ledger. (Revisit FA/F3 if you have to – this is fundamental.)
The main substantive procedure for receivables at the y/e is external confirmation (debtors circularisation). The point is that the sample of balances will be selected from the list of balances extracted from the sales/debtors ledger – BUT it is the balance on the control a/c in the general ledger that will be extracted to the financial statements. THEREFORE it is essential to agree the total of the list of balances to the control a/c ledger balance – if they don’t agree they have to be reconciled (by the client). So the auditor must agree the reconciliation before selecting the balances to circularise (i.e. to confirm the completeness and accuracy of the list of balances).August 24, 2019 at 1:51 pm #528646Kim SmithKeymaster
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Also – you are confusing documents with books/ledger accounts.
Documents are goods received/despatch notes, purchase/sales invoices, etc.
Cash/sales/purchase day books are books of prime entry
Day books are posted to ledger a/cs
General ledger a/c balances are extracted to a trial balance
Year end adjustments are made for depreciation/closing inventory/accruals and prepayments/bad debts, etc
The trial balance as adjusted for these y/e adjustments provides all the amounts that make up the statement of profit or loss and statement of financial position.
All of this is assumed knowledge of FA/F3.
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