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1) When the auditor agrees good despatch notes to sales invoices, he is making sure that each GDN corresponds with a particular sales invoices and sales order. A sale must have been recorded in the records when the goods were despatched.
If goods are despatched in December, then the sale is recorded in December even if payment is received three months later in march.
This tests for completeness and whether a receivable truly exists who initially placed the order and to whom the goods are despatched. (Existence)At the same time, this tests for cut off of revenue. (That the sales generated by the items despatched were recorded in the correct period)
Because when I record debit receivable, I also record Credit sales.
But how do I convert this procedure into a procedure for revenue?
2) A positive receivables circularisation tests for “rights and obligations.” This means that by confirming the balance owed, or denying it and giving details of the items making up the difference, the customer establishes ownership of the receivable balance he owes the company… Right?
3) If there is a balance owed on the aged receivables listing for, let’s say, 140 days, then that’s too long and the management should be contacting the customer, and evaluating whether the amount will be recovered… Does this customer have liquidity problems? Do they plan to pay? Do they plan to delay further? How serious are they… So on and so forth… So this tests for valuation(recoverability).
But how does it rest for allocation? Since the amount is long due, it could be that the amount is disputed or the accountant has erroneously misrecorded or recorded twice or recorded another customers balance in this account, right? So that is how it tests allocation. But can’t it also be testing “rights and obligations” since the customer is denying ever placing this order…
4) Can the audit enquire with the management whether it plans to investigate credit balances that have been long standing on the aged receivables listing and if the disputed invoices are cleared i.e the company agrees to wrongful recording, then what are the steps the company is taking to send credit notes to these customers…
It could be: discuss with management their plans to investigate long-standing credit balances on the aged receivables listing and whether they plan on sending credit notes and subsequently clear the balances (or reclassify as payables) against which the disputes have been solved….5) I came across this procedure: Inspect a sample of post year end credit notes to identify any that relate to pre year end transactions to ensure that they have not been included in receivables…
Why are we testing for this? The accountant doesn’t revert to previous year’s accounts and keep updating them to show any recent developments such as sales returns, does he?
I think he just gives a disclosure…How does this procedure test for existence?
6) How does the comparison between average receivables collection period test for completeness??
Because if there is a trend, like a steady increase proportional to the increase in receivables then the records are more reliable???I am aware that this tests for valuation i.e. it gives an idea of how soon or how late the receivables are settling their debts.
If there are too many questions, kindly respond only to the more serious ones, specifically those where I am making logical blunders…
Much thanks for your time!
1) You don’t really have to “convert” it. Consider the “flow” of events in an accounting system say sales:
Order -> Goods despatch -> Invoice -> Daybook/listing -> Ledger a/cs
Because the posting to the general ledger is a double entry you are confirming completeness and accuracy of recording revenue and the receivable.
2) “rights and obligations” is a composite assertion – the “rights” is relevant to assets and the “obligations” is relevant to liabilities.
In confirming existence of a receivable through external confirmation (don’t call it “circularisation” – this is old terminology and the examining team don’t like it) you also confirm that the audit client “owns” (i.e. has the right to) the debt.
3) Bear in that long before 140 days are up, a company should have collection procedures – first reminders, then calls (most likely by a credit controller rather than “management”) and maybe put into the hands of debt collection agency. If a debt that should have been paid after 30 debts is more than 90 days “past due”, a company should most likely be making an allowance for it (and not allowing the customer further credit).
“Accuracy, valuation and allocation” is also a composite assertion. An example of allocation would be depreciation expense on factory equipment (i.e. a production overhead) being allocated to inventory. There is no testing of “allocation” for receivables.
4) A valid credit balance on a receivable a/c represents a liability – it means that the customer has overpaid. For example, it paid for some goods, but they were faulty and then returned them and then the company has raised a credit note.
There are NO credit notes to be sent in respect of credit balances – the credit balance exists because the a/c has already been credited.
A credit balance may clear in the ordinary course of business – e.g. the customer order replacement goods, but now doesn’t have to pay for them, because their a/c is already “in credit”.
If there was to be no further business with the customer, the company would have to refund cash to clear the credit balance.
5) Credit notes can be raised for many reasons e.g. to correct pricing errors on invoices and to cancel invoices (e.g. because goods have been returned).
If a credit note is raised after the y/e for goods returned – was there a valid sale of those goods? Should revenue be recorded in the year ended? Most likely NO (consider that if replacement goods are sent, that will be a sale in the next year – it can’t be both or revenue will be double-counted).
Absolutely, the financial accountant DOES make “period-end adjustments”. The total of a list of credit notes would be a journal adjustment “Dr Revenue/Cr Receivables”.
It is a test for existence because credit notes could be raised to cancel “fictitious” sales – i.e. inflate revenue (e.g. for a performance bonus) by raising lots of sales invoices at the end of the year, but cancel them shortly afterwards.
6) To prove something about ratio analysis/analytical procedures, I like to make some numbers up.
For example – suppose daily sales are $1k, so total revenue is $365k
If customers settle in 30 days, y/e receivables will be $30kSuppose there is a cut-off error and the last 5 days’ revenue for the year is not recorded – i.e. incomplete.
Total revenue will now be $360k and trade receivables $25k – the collection period is now only 25 days.
So we can conclude that a fall in collection period could be due to omission of sales. This would be more plausible that saying that credit control has improved if customers have 30 days credit (why would they pay more quickly than the period of credit granted)?
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