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another question sir, for the purpose of the audit exam do we have to assume that GDN and sales invoice are issued at a same date ie. same day.
Overtrading means just that – that the business has more trade than it can handle. This typically arises when expansion of trade is not supported with sufficient working capital. So it’s all very well having a profitable product, but because of the working capital cycle, you are going to have to pay suppliers (and employees) before you receive cash from credit customers – so you need sufficient finance. You wouldn’t describe a business to be overtrading if it has negotiated suitable finance.
I think if the date is relevant – and it’s other than the same day – a scenario would have to state that fact.
In a computerised system, the raising of a GDN may automate the raising of the sales invoice – so the same day.
In a manual or batch processing system, the GDNs could be batched each day to be “processed” on the next working day – so the sales invoice may be later (but never before).
Unnecessary delays between the despatch of goods and invoicing would be a deficiency in credit control.
so if we see increased sales and worsening working capital ratios, can we suggest that this is a risk of overtrading which may give raise to going concern implication.
thanks.
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