March 2020 Sample exam – Valuation of Encore co. Receivables

Here is a link to the question: https://www.acowtancy.com/exams/acca-aa/cbe-question/mar-2020-sample-q3b?fsid=80de72df0d4ac07abc17c208c8d2565e68097703

It is 1 July 20X5. You are an audit supervisor with Velo & Co and you are working on the final audit of Encore Co for the year ended 30 April 20X5. Encore Co is a waste management company, supplying its services to a variety of governmental and business organisations.

Encore Co’s draft profit before tax is $5.3m (20X4: S4.6m) and total assets are $40.1m (20X4: $33.9m). You have been provided with the following information regarding the draft financial statements.

Trade receivables
Encore Co’s credit controller left the company in January 20X5 and has only recently been replaced. The trade receivables collection period increased from 49 days as at 31 December 20X4 to 66 days as at 30 April 20X5. Year-end trade receivables amounted to $9.1m (20X4: $7.1m) and an allowance for irrecoverable receivables of $182,000 (20X4: $142,000) has been made.

Here is the answer from the examiners report.

Review the aged receivables listing to identify slow moving or old balances. Discuss the status of these balances with the credit controller to assess whether the customers are likely to pay or if an allowance for receivables is required.
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Review whether there are any after-date cash receipts for slow moving/old receivable balances.
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Review correspondence with customers in order to identify any balances which are in dispute or unlikely to be paid and discuss with management whether any allowance is required.
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Review board minutes to identify whether there are any significant concerns in relation to outstanding receivables balances and assess whether the allowance is reasonable.
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Obtain a breakdown of the allowance for trade receivables. Recalculate it and compare it to any potentially irrecoverable balances to assess if the allowance is adequate.
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Review the payment history for evidence of slow paying by any customers who were granted credit in the period when there was no credit controller and who may not, therefore, have been properly scrutinised.
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Discuss with the finance director the rationale for maintaining the allowance at the same level in light of the increase in the receivables collection period and the absence of a credit controller.

Inspect post year-end sales returns/credit notes and consider whether an additional allowance against receivables is required.

My question is:

A lot of the procedures suggested are focusing on whether a bad debt allowance is required, and how much it should be, whether the bad debts are paid off after the year end… Basically, all of it is revolving around the allowance for the recoverable debts…

In my humble opinion, if we are testing for the valuation of receivables i.e. if the value recorded against year end receivables is accurate, should we not be “recasting the list of individual receivable balances and agreeing to trial balance,” “comparing the current year’s total receivables to the prior years,” “conducting a receivables’ circularisation” and so on…

My understanding is that because this scenario is a bit unique and the credit controller position was vacant for some time, and now there is a newly hired credit controller so may be that is why, they want us to focus on whether the allowance is recorded accurately, because the allowance affect the receivables amount recorded… Am I correct? Basically, how should I be thinking?

* Do the standard procedures become useless or less preferred when a unique situation like this is given in the question?

* There is a procedure suggested: Discuss with the finance director the rationale for maintaining the allowance at the same level in light of the increase in the receivables collection period and the absence of a credit controller.
They want me to think that the percentage of allowance should be a bit higher this year because of the long vacancy of a credit controller, because in both the years the allowance is 2 % of the receivables balance so it should have been a bit higher this year, right?

* Can you please suggest any other procedures in this scenario that are a bit simpler and might stick in my memory?

Much thanks !