Substantive Procedures – Receivables & Payables

See top of page 86 of the AA notes with regard to receivables:

“Disagreements, which may be due to timing differences or errors (the client’s or the customer’s), will need to be reconciled. Timing differences arising at the confirmation date may include:
? Cash-in-transit (ie payments by customers not received by the client);
? Goods-in-transit (ie goods sent and invoiced by the client not received/recorded by the
customer).”

Such timing differences concern the cut-off assertion for transactions.

If the audit client is the seller – i.e. you are looking at receivables – suppose a customer’s ledger balance is $1,000 at the year end. If in response to an external confirmation request the customer confirms “I owe only $400 at y/e” – they will hopefully give the reason(s) for example:

$300 invoice for goods not received at y/e
$200 payments sent before y/e
$100 over-charged on an invoice

The auditor will then have to confirm each reconciling amount:
$300 – goods despatched to customer before the y/e per GDN (i.e. not included in inventory)
$200 – receipt of cheque/bank transfer after y/e
If these are confirmed, timing differences are not errors and no correction is required to the $1,000 receivable balance

Regarding $100 – if the seller agrees – a credit note should be raised after the y/e which should be accrued at the y/e. The total of the credit note accrual would be offset against total receivables presented in the statement of financial position.
If the seller does not agree – it would be prudent to recognise a different credit – namely an allowance of potentially irrecoverable (“doubtful”) debt.

Payables is just the “opposite” perspective.