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Hi Sir,
In doing the substantive procedures for the receivables one of the analytical procedures is to do the average collection period and compare it with last year collection period
but the question is what the assertion it does give us with regard to financial statements balance.I can understand it will show how fast the receivables is being collected compare to the last year but again what is benefit from that if we want to assert the year end balance.
Thanks.
Say you expect the average collection period to be 40 days and that is the same as last year and there is no business reason why it should have changed. If you calculate it as 50 days, say, then, considering the calculation, receivables could be overstated (e.g. because some debts are irrecoverable – an aspect of valuation) and/or revenue understated (e.g. due to a cut-off error). Both the assertions of valuation and cut-off are also linked to accuracy and completeness.
Remember that analytical procedures are a requirement as a risk assessment procedure – and for such an important account balance as trade receivables, is unlikely to be sufficient as a substantive procedure for any one assertion.
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