Audit procedures for receivables

It’s related to “cut-off” – ensuring that transactions are properly recorded in the periods to which they relate. It’s best illustrated by just thinking about what is happening. Suppose X Co has y/e 31 December 20X0.

In December it raised an invoice for $50k – Dr Receivable/Cr Revenue

In January it raises a credit note $5k – Dr Revenue/Cr Receivable

If you don’t offset the credit note against the invoice as at 31/12/X0, both receivable and revenue will be overstated by $5k.

ALSO consider, the reason for the credit note may or may not be relevant to inventory as at 31/12/X0. For example:
1. customer was overcharged due to a pricing error or omitting to give the customer an agreed discount – has no effect on inventory;
2. customer returned goods (for some reason):
a. if returned before the y/e, they should have been included in the y/e count so no adjustment needed.
b. if returned after the y/e, they should be included in the y/e inventory valuation (at the lower of cost and NRV).

Although the auditor is not looking specifically for fraud, you should be able to see that raising “fictitious” invoices before the y/e and reversing them after the y/e could artificially inflate revenue. So the review of post-y/e credit notes is an important audit procedure in testing the occurrence of sales.

You are very welcome!