detection risk

Because there’s increased risk that sufficient appropriate audit evidence will not be obtained. Consider for example – y/e 31 December – material trade receivables and average collection period 60 days. If reporting deadline end of May, that’s plenty of time to be auditing after-date cash receipts to confirm the recoverability of receivables and the adequacy of any allowance for irrecoverable debts. If reporting deadline was end of March, say, there will be less evidence of recoverability available.

It is management’s responsibility to prepare the financial statements and therefore management’s responsibility to make a suitable allowance or write off a debt as appropriate in the circumstances. Management may know a particular customer to be simply a poor payer who will only pay when they receive a “red letter” (i.e. a final demand before taking the debt to court). In this case they may make no allowance. The company is likely to have a policy of first making an allowance (which keeps the debt recorded in the books) and only to write it off when every avenue of recoverability has been exhausted.

The auditor’s responsibility is to obtain sufficient appropriate audit evidence regarding the assertions associated with trade receivables which for valuation means the allowance must be adequate.