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Hello Sir, I hope you’re doing well.
Sir, I had a question to ask. Suppose we are auditors of a particular firm auditing a company and we have a receivable balance which is settled post year end, will we ask the management to remove the balance since it is settled or would we ask them to let it be since it was still a receivable in that particular year we are auditing. Same question for the payables.
I would appreciate your answer.
Thank you.Short answer – it CANNOT be adjusted.
I wrote an extensive answer on the same question some time ago – sadly can’t find it (which is why subject lines are important on these posts).
So, these are the points to consider for anyone reading this post:
1. DE FACTO the cash transaction occurs in the next period, so the CUT-OFF assertion requires that it be accounted for in the next accounting period.
2. The receipt of after-date cash is an alternative procedure to confirm the EXISTENCE of a receivable (e.g. if they do not reply to an external confirmation request).
3. It also provides evidence of the recoverability of the debt (i.e. VALUATION).
4. It is NOT an adjusting event (which is what removing the balance would mean) – suppose a balance is $1,000 – the receipt of $1,000 does not provide additional evidence that the balance should be anything other than $1,000 (it is confirming that the balance is $1,000).
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