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Which of the following are benefits of carrying out a trade receivables circularisation?
(1) It provides evidence from an independent external source
(2) It provides sufficient appropriate audit evidence over all relevant balance assertions
(3) It improves audit efficiency as all customers are required to respond
(4) It improves the reliability of audit evidence as the process is under the control of the auditorAnswer: 1 and 4 only
Which of the assertions do the trade receivables circular not give evidence on?
This is an interesting question – there are a number of points to learn from it.
1. Most audit procedures have just one primary objective – of all the assertions relevant to assets (page 84 of the notes) – the primary assertion tested is existence.
2. There is no one procedure which tests all relevant assertions (consider, for example the the direction of testing for completeness and existence are “opposite” – there is an illustration of this for wages here https://opentuition.com/topic/wages/)
3. If a customer replies that they agree a balance of $10,000 (say), this alone is not evidence of:
– Rights – the company could have factored debtors to a third party
– Completeness – the customer is more likely to confirm a balance of just $10,000 when they know they owe more than $10,000 (whereas, if they owed less than $10,000 they are more likely to challenge the balance)
– Valuation – even if they agree the balance the customer may not intend or have the means to settle it.
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