trade and other receivables

Trade and Other Receivables

1Trade and other receivables

I. Check and document the internal control relevant to trade and other receivables (e.g. walkthrough test / Flow charts)

Decide the risk associates with balances based on internal controls relevant to above.


How to verify trade and other receivables

What will be the result when internal controls are weak / strong.

When controls are weak High riskWhen controls are strong Low risk

II. Decide material Level (Individual) based on risk

Document performance material level during the audit.



What will be the percentage when risk is high?

When risk is high?When risk is low?

Use low percentageUse high percentage

III. Select a sample.e.g.-Random basisSystematic selection

Document Sample Size which you have selected.



IV. Decide and perform audit procedures.

When deciding audit procedures also we should go through • Last year audit file• Quarry points and answers• Management letter and answers• Qualifications• Internal audit repots etc…



Why trade debtors become most important?


Trade debtors

Higher risk.

Deals with revenue.

Financial statements can be manipulated with turnover.


Audit procedures for debtors Check a sample of debtors with supportive documents.

Obtain an aging analysis• Why we need an aging analysis.• When there is no aging can be obtained what needs to

be done.• Check whether the aging balance tally with ledger

balance.• Check whether there are any related party balances

included in the debtor balance . If so cross check with inter company.

• If there are any long outstanding balances inquire the recoverability thereof.

Check subsequent settlement details Check whether there are any unusual journal entries passed through

the debtors ledger.(Control account). Call confirmations for sample of debtors. Check the sample of opening debtors settled during the year.


Audit procedures for debtors Perform cut-off procedures.

• How to perform a cut-off? • Why we need a cut-off?

Obtain a list of credit balances included in debtors.• Obtain the reasons for outstanding balances.• Check the materiality of thereto.• If it is material, separately mention the balances as advances /

payables. Check the last month sales with debtors control account.(fake

invoices) Check whether balances are included in the debtors aging analysis

other than debtors.e.g.- Fixed deposits in ERP systems.

Evaluate the adequacy of provisions for bad and doubtful debtors.




• Obtain schedules for opening balance and closing balances.• Check sample of debtors recovered during the year. • Check whether the closing balance of schedule is equal to the

ledger balance. (when monthly provisions)

However provision for bad and doubtful debtors are not allowed under financial instruments and allowed under Sri Lanka Accounting standard for SMEs.



Ex – Debtors 1,000,000Provision for discounts 5%Bad debt provisions - Specific A 5,000

B 7,500C 10,000

Opening balances - Provision for discounts 28,879 - Provision for doubtful debtors 56,431

Calculate the general provision.



Answer

Provision for discounts {(1,000,000-22,500)*5%} 48,875

Provision for bad debts-Specific A 5,000

B 7,500C 10,000 22,500



Ex – Debtor balances of ABC company as at 31st March 2016 is as follows.

X 1,000,000Y 2,500,00Z 3,000,000

Company has decided to provide 5% provision for bad debts of Z amounting to Rs. 3,000,000/-.

Comment whether this is a specific provision or general provision.

Foreign currency debtors should be converted to Rs using buying rates as at the reporting date.

Discuss why we should use buying rate.


Converting of foreign currency debtors


Converting of foreign currency debtors

Ex – Debtors balance as at 31st March 2016 $ 2,000Buying rate of 1$ as at 31st march 2016 Rs.128Balance of debtors as per ledger 240,000

RequiredJournal entries relevant to converting the debtors.

Trade debtors (Dr) 16,000 Exchange gain (Cr) 16,000

Recalculate the prepayments and compare with the ledger balance.

Check supportive documents. Check opening balances are transferred to expense accounts. Is there any unsolved matters mention in the workings and

MAPs.


Prepayments


Advances and other receivables

Check the supportive documents for receivables and advances as at the balance sheet date.Obtain a detailed schedule which supporting to the ledger balance.Check subsequence recovery / settlement detail.

• What are the documents Internal / external.Check whether the opening balances of advances / pre - payments appropriately recognized with assets / expenses.Obtain explanations for long outstanding balances and check necessity of identifying a provision.If the amounts are material obtain confirmations for the balances. Check the classification of advances and receivables.

Trade and other receivables 17

trade and other receivables

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