Accounting and Audit approach of Trade Receivables
Audit of Trade Receivables broadly divided into 6 approaches
Completeness
- The overall objective of the audit of trade receivable and sales are too determine that they are fairly presented in the context of the financial statements as a whole.
- The basis on which credit limits for customers are to be determined should be clearly laid down. The credit limits fixed in respect of individual customers should be approved by an official independent of the sales department. These limits should be checked before orders are accepted by the customers. There should also be a system of periodic review of the credit limits.
- Credit days with respect to every trade receivable should be clearly stated and mentioned in the ERP so that no customer can buy goods beyond its credit limit and credit days from the company unless they cleared their past dues.
Existence
- Check that the trade receivablereflected in the balance sheet exist, are for real and valid trade transactions i.e. not arise due to bogus entries.
- Use the balance confirmation process for those trade receivables which constitute more than 10% of the total value of the trade receivables exists as on the balance sheet date. Note: Use Positive Confirmation so that it Provides reliable evidence.
- Inquire and analyze those receivables that have been assigned, pledged, unbilled, or discounted or are with related parties.
- For Debtors who don't have a closing balance in a ledger, or has been nullified during the year. Perform detail scrutiny of such debtors and trace whether the payment has been actually received by the company in his bank account or the debtors has been adjusted by passing an adjustment entry.
Accuracy
- Check some Invoices of sale on a random basis (60% to be covered) and the Invoices are for the correct amount only.
- Compare the proportion of bad debt expense to sales for the current year in comparison to previous years.
- Review a trend analysis of sales and trade receivable or a comparison of the two over the financial year, to see if there are any unusual trends.
- Further, make a comparison of receivables to current assets. And also measure the average collection period. If there is any variance with companies' average collection period, make inquiries about the reasons for changes in the trends.
Valuation
- Obtain an ageing analysis from the management i.e. less than 6 months and more than 6 months. Check some entries on a random basis through the sales bills and verify the same.
- Bad debts are written off during the year is properly authorized by the top management along with the reasons for not able to recover the said amount and the written-off amount is not to be included in the value of debtors and to be charged in Profit & Loss Account
Obligation
- Check whether the debtors are mortgages to the bank or not with respect to the working capital loans.
- Check whether the company has sold some of its debtors to factoring agency and terms and conditions of such factoring agreement is prejudicial to the interest of the company or not.
Presentation
- The aggregate amount of Trade Receivables outstanding for a period exceeding six months from the date they are due for payment should be separately stated.
- Trade receivables shall be subclassified as: (a) Secured, considered good; (b) Unsecured, considered good; (c) Doubtful.
- Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.
- Debts due by directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies respectively in which any the director is a partner or a director or a Members should be separately stated.
Click here to download Audit Checklist of Trade Receivables (Word File)
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