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1) Obtain the aged receivables listing and agree to the balance on the trade receivables’ account and the trial balance. (This tests for accuracy and completeness) Am I correct?
2) Inspect a sample of post year end credit notes to identify any that relate to pre-year-end transactions and ensure that they have not been included in receivables. Here the accountant should have created a year end adjustment and adjusted the receivable balance by crediting receivable and debiting revenue. I understand this.
Found a similar procedure in the kit that states: Inspect post year end credit notes and consider whether an additional allowance against receivables is required. This is testing the adequacy of bad debt allowance created against the receivables’ balance. The auditor is thinking: Should the allowance be greater than what it is currently, and if there are any goods returned post-year-end, then more receivables will be credited… Right? Which assertion is this testing?
3) In a past exam scenario, the audit team decides to not conduct an external confirmation due to historically low responses from receivables. And the answer revolves a lot around procedures that test for valuation. This is because in the absence of an external confirmation from the customer, the auditor will question whether each receivable balance really exists and whether it is recoverable,
right?Thank you for clearing my doubts!
I have only just started with substantive procedures, but I think I have worried you enough with all these receivables’ questions.
I seem to have gotten the hang of it now. Somewhat…
Thank you!
1) It would only be completeness to the extent that recorded balances are complete. Additional tests would be relevant for completeness (e.g. Dr balances in a payables ledger that represent advance/over payments are an asset and would be added to “other receivables” (if material).
Regarding the similar procedures – the “allowance” for credit notes/goods returns (which we discussed on a very recent post) has nothing to do with a “bad debt” allowance. If a customer’s balance is written off as a bad debt, it is effected through a journal entry – not the raising of a credit note. The movement in any allowance for doubtful/only potentially irrecoverable debts is also effected through a journal entry (e.g. an increase would be Dr Expense/Cr Allowance) and for presentation purposes, the allowance is deducted from gross receivables in the SoFP.
3) There’s no point requesting external confirmation if respondent don’t reply – they can’t be “made” to reply. No-one gives me money unless they owe it to me – so receipt of cash after-date corroborates existence 🙂
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