Debtors
form a significant item amongst the assets of most companies and its
verification is a key part of the audits work.
form a significant item amongst the assets of most companies and its
verification is a key part of the audits work.
Debtors
generally comprises of two main components:
generally comprises of two main components:
·
Trade debtors, i.e. sales ledger balances;
Trade debtors, i.e. sales ledger balances;
·
Prepayment.
Prepayment.
The
audit will be gathering sufficient appropriate evidence to verify the
assertions that:
audit will be gathering sufficient appropriate evidence to verify the
assertions that:
·
The debtors represent bona fide customers (existence)
The debtors represent bona fide customers (existence)
·
The amount are due to the business (right and obligations)
The amount are due to the business (right and obligations)
·
The amount due are correctly stated at the appropriate value (valuation
and allocation)
The amount due are correctly stated at the appropriate value (valuation
and allocation)
·
All amount due have been recorded (completeness).
All amount due have been recorded (completeness).
One
point to remember is that auditors are only interested in validating the figure
for debtors as a total, they are not interested in individual; debtors account
except:
point to remember is that auditors are only interested in validating the figure
for debtors as a total, they are not interested in individual; debtors account
except:
·
If there is a suspicious of fraud
If there is a suspicious of fraud
·
As part of compliance test of the sales system
As part of compliance test of the sales system
Trade Debtors-Compliance Testing of Internal
Control Procedures
Control Procedures
As
part of their audit of balance sheet items auditors will have regard to the
internal control incorporated into the system in which the debtors are
recorded. For example, the figure for trade debtors is largely derived from the
sales ledger which is part of the sales system, so control within the sales
system are relevant to the auditor’s evidence gathering procedures for trade
debtors’ verification.
part of their audit of balance sheet items auditors will have regard to the
internal control incorporated into the system in which the debtors are
recorded. For example, the figure for trade debtors is largely derived from the
sales ledger which is part of the sales system, so control within the sales
system are relevant to the auditor’s evidence gathering procedures for trade
debtors’ verification.
The
auditor will consider control designed to ensure that the control objectives
for the sales and debtors system are achieved, i.e.
auditor will consider control designed to ensure that the control objectives
for the sales and debtors system are achieved, i.e.
·
All goods and services despatched are invoiced.
All goods and services despatched are invoiced.
·
Invoices are raised for the correct prices.
Invoices are raised for the correct prices.
·
All discounts are authorised.
All discounts are authorised.
·
Goods on credit are only despatched to approve credit-worth customer.
Goods on credit are only despatched to approve credit-worth customer.
·
All invoices for sales are properly recorded and that the persons
responsible for dealing with these are separate for those responsible for
processing sales transactions.
All invoices for sales are properly recorded and that the persons
responsible for dealing with these are separate for those responsible for
processing sales transactions.
·
Outstanding balances are reviewed and possible bad debts pursued.
Outstanding balances are reviewed and possible bad debts pursued.
·
All balance written off is authorised.
All balance written off is authorised.
Compliance Tests
Determine
the system of internal control over sales and debtors. The system for debtors
should ensure that:
the system of internal control over sales and debtors. The system for debtors
should ensure that:
·
Only bona fide sales bring debtors into being.
Only bona fide sales bring debtors into being.
·
All such sales are to approved customers
All such sales are to approved customers
·
All such sales are recorded
All such sales are recorded
·
Debts are collected promptly
Debts are collected promptly
·
Balance are regularly reviewed and aged, a proper system for follow-up
exists, and if necessary, adequate provision for bad and doubtful debts is
made.
Balance are regularly reviewed and aged, a proper system for follow-up
exists, and if necessary, adequate provision for bad and doubtful debts is
made.
Substantive Testing
·
Obtain an aged schedule of debtors and agree the total to the control
account. Note that with computerised accounting system the balance will
undoubtedly agree.
Obtain an aged schedule of debtors and agree the total to the control
account. Note that with computerised accounting system the balance will
undoubtedly agree.
·
Test a sample of balances on ledge accounts to the schedule and vice
versa where this has not been produced directly from the sales ledge system.
Test a sample of balances on ledge accounts to the schedule and vice
versa where this has not been produced directly from the sales ledge system.
·
Ensure the make up of balances. They should be composed of specific
items.
Ensure the make up of balances. They should be composed of specific
items.
·
Ensure each account is settled from time to time.
Ensure each account is settled from time to time.
·
Enquire into the reason for any credit balance-this may lead to omitted
sales.
Enquire into the reason for any credit balance-this may lead to omitted
sales.
·
Consider the valuation of debtors. This is dealt with in the next
paragraph.
Consider the valuation of debtors. This is dealt with in the next
paragraph.
Provision for Bad and Doubtful Debts
The
valuation of debtors is really a consideration of the adequacy of the provision
for bad and doubtful debts. The auditors should consider the following:
valuation of debtors is really a consideration of the adequacy of the provision
for bad and doubtful debts. The auditors should consider the following:
·
The adequacy of the system of internal control relating to the approval
of credit and following up of poor payers.
The adequacy of the system of internal control relating to the approval
of credit and following up of poor payers.
·
The period of credit allowed and taken.
The period of credit allowed and taken.
·
Whether balance have been settled after the year end.
Whether balance have been settled after the year end.
·
Whether an account is within the maximum credit approved.
Whether an account is within the maximum credit approved.
·
Reports on major debtors from collectors, trade associations etc.
Reports on major debtors from collectors, trade associations etc.
·
Present value and reliability of any security lodged as collateral.
Present value and reliability of any security lodged as collateral.
Analytical Review
Auditors
should carry out analytical review proceeding as part of substantive testing.
These should include:
should carry out analytical review proceeding as part of substantive testing.
These should include:
·
Debtor days ratio i.e.;
Debtor days ratio i.e.;
·
Comparisons with budgets or prior years;
Comparisons with budgets or prior years;
Note
that:
that:
·
Debts which are considered irrecoverable should be written off to the
profit and loss account.
Debts which are considered irrecoverable should be written off to the
profit and loss account.
·
Specific provisions for doubtful debts should be set up against debts
which are considered doubtful.
Specific provisions for doubtful debts should be set up against debts
which are considered doubtful.
Debtors Circularisation
Good
independent audit evidence can be obtained from circularising the debtors (or
some of them) for direct confirmation.
independent audit evidence can be obtained from circularising the debtors (or
some of them) for direct confirmation.
The
advantages of this technique are:
advantages of this technique are:
·
Direct external evidence is the effectiveness for the system of internal
control. If the sales ledger is recording the debtors correctly it follows that
the system that leads up to it, i.e.
Direct external evidence is the effectiveness for the system of internal
control. If the sales ledger is recording the debtors correctly it follows that
the system that leads up to it, i.e.
·
It assists in the auditor’s evaluation of cut-off procedures as it can
identify invoices in transit over the year end.
It assists in the auditor’s evaluation of cut-off procedures as it can
identify invoices in transit over the year end.
·
It provides evidence of items in dispute.
It provides evidence of items in dispute.
There
are two methods:
are two methods:
1.
Negative Circularisation:
Negative Circularisation:
The
customer is asked to communicate only if they do not agree the balance. This
method has within it a fatal flaw insofar as it is impossible to tell whether
the debtor agrees with the balance or has simply thrown the letter away.
customer is asked to communicate only if they do not agree the balance. This
method has within it a fatal flaw insofar as it is impossible to tell whether
the debtor agrees with the balance or has simply thrown the letter away.
2.
Positive Circularisation:
Positive Circularisation:
The customer is asked to reply whether they agree the balance or not or
is asked to supply the balance themselves. This is the favoured method.
is asked to supply the balance themselves. This is the favoured method.
The
approach is as follows:
approach is as follows:
·
Obtain the co-operation of the client-only they can ask third parties to
divulge information.
Obtain the co-operation of the client-only they can ask third parties to
divulge information.
·
Select a sample. All customers can be circularised but this is unusual.
Select a sample. All customers can be circularised but this is unusual.
·
Do not omit-
Do not omit-
·
Nil balances;
Nil balances;
·
Credit balances;
Credit balances;
·
Accounts written off in the period.
Accounts written off in the period.
·
Give weight to overdue or disputed balances.
Give weight to overdue or disputed balances.
·
The letter should be:
The letter should be:
·
From the client;
From the client;
·
It should request a reply direct to the auditor;
It should request a reply direct to the auditor;
·
It may contain a stamped, addressed, envelope or a pre-paid reply
envelope addressed to the auditor;
It may contain a stamped, addressed, envelope or a pre-paid reply
envelope addressed to the auditor;
·
It must be despatched by the auditor-do not let the client post the
letter as this will devalue the inadequate of the test.
It must be despatched by the auditor-do not let the client post the
letter as this will devalue the inadequate of the test.
·
Receive and evaluate replies.
Receive and evaluate replies.
Example of Debtors Circularisation Letter (Positive
Method)
Method)
FROM: TO:
HEDONITE
MANUFACTURING LTD ECSTATIC
MINING LTD
MANUFACTURING LTD ECSTATIC
MINING LTD
CLOGHAMPTON WIMPTON
Dear Sir,
As
part of their normal audit procedures, we have been requested by our auditors
Tackett and run to ask you to confirm direct to them your indebtedness to us as
shown on the enclosed statement as at 31 December 20-7.
part of their normal audit procedures, we have been requested by our auditors
Tackett and run to ask you to confirm direct to them your indebtedness to us as
shown on the enclosed statement as at 31 December 20-7.
If
the statement is in agreement with your records, please sign in the space
provided below and return this letter directly to our auditors using the
per-paid envelope provided.
the statement is in agreement with your records, please sign in the space
provided below and return this letter directly to our auditors using the
per-paid envelope provided.
If
the statement is not in agreement with your records please notify our auditors
directly of the amount shown by your records and if possible send them full
particulars of the difference.
the statement is not in agreement with your records please notify our auditors
directly of the amount shown by your records and if possible send them full
particulars of the difference.
It
will be of assistance to us if you will give this request your early attention.
will be of assistance to us if you will give this request your early attention.
This
is not a request for payment and no remittance should be sent to our auditors.
is not a request for payment and no remittance should be sent to our auditors.
Yours
faithfully,
faithfully,
J. Brown,
Chief
Accountant
Accountant
____________________________________________________________
Name
of Debtor ECSTATIC Mining
Ltd
of Debtor ECSTATIC Mining
Ltd
The balance shown on the statement at 31.12-7 of
£1,432.00 due from us is/is (delete as appropriate) in agreement with our
record at 31.12-7.
£1,432.00 due from us is/is (delete as appropriate) in agreement with our
record at 31.12-7.
If it does not agree the reason for the difference
is
is
______________Signature _____________Date
______________Position
______________Company
Stamp
Stamp
____________________________________________________________
Pre-payments
These
are amount paid for in one period which relate to the next period. In many
cases these are not material and testing will be minimal.
are amount paid for in one period which relate to the next period. In many
cases these are not material and testing will be minimal.
·
Reviewing the client’s system for ensuring all prepayment are identified
and properly calculated.
Reviewing the client’s system for ensuring all prepayment are identified
and properly calculated.
·
Re-performing the calculations.
Re-performing the calculations.
·
Reviewing transactions after the year end.
Reviewing transactions after the year end.