08 December 2008
During the process of verifying trade debtors, the auditor needs to ascertain adequate internal controls on the client’s accounting system which in particular sales. The auditor will need to be satisfied that: all orders received are correctly executed; an invoice is produced for all goods dispatched; credit is given only in approved circumstances; customers are charged the correct amount; all invoices are correctly recorded in the ledger; all customers’ returns are dealt with and credit notes issued only with the appropriate authority; an age analysis of debtors is produced regularly and unpaid accounts are chased; adequate procedures are present regarding the control of cash received from debtors; all cash received is relate to invoices and recorded in the ledger; a debtors’ ledger control account is maintained and agreed at the end of each month to a detailed list of balances. The auditor will obtain evidence that the above re: accounting systems and internal controls are satisfactory by either: performing extensive substantive testing or seeing that internal controls are present which will ensure that accurate and reliable records are produced and confirming this by compliance tests and a reduced amount of substantive testing.
08 December 2008
Obtain the client’s permission If this is not forthcoming, the auditor will have to decide if alternative procedure are available to overcome this e.g. extended testing of customers’ remittance advice
Decide the sample required. This will depend on:
the opinion formed regarding the reliability of the ledger during his work on the accounting system and internal control; whether a positive or negative circularization is to be undertaken Select the sample. This should include NIL balances
Control the posting of the letters
Enclose a stamped addressed envelope to ensure that all replies are received by himself
Send reminders if any replies are not received
Investigate thoroughly any balances which are not agreed by the customers. Full explanation should be obtained and the auditor may have to perform additional testing to satisfy himself.
Where no reply is received, the auditor should perform additional testing regarding the balance. This testing will include:
Agreeing the balance to cash received; Agreeing the detail of the balance to the customer’s remittance advice; Preparing a detailed analysis of the balance, ensuring it consist of identifiable transactions and confirming that these transactions occurred. Prepare a final summary of the results of the circularization and draw the final conclusion
08 December 2008
The auditor will need to be satisfied of correct cut-off. Without a correct cut-of, sales can be overstated hence the need to perform the following cut off tests:
1.0 For the last invoices issued during the year and which have been included in the debtors; the goods have been despatched; the goods are not included in stock 2.0 All good dispatched prior to the year end have been invoiced and included in debtors; 3.0 No goods dispatched after the year end have been invoiced and included in debtors
08 December 2008
The auditor will need to be satisfied that the figure appearing in the balance sheet for trade debtors is all receivable. The auditor will have to be satisfied that an adequate provision had been made for all debts. 1. Obtain a detailed age analysis of the year end of debtors and test the analysis for a selection of the balances; 2. Obtain an analysis of the provision for doubtful debts; 3. Scrutinize the analysis and identify those debts which appear doubtful; 4. Discuss with management their reasons, if any of these debts are not included in the provision for bad debts; 5. Perform further testing where any disputes exists; 6. Reach a final conclusion regarding the adequacy of the bad debts provision
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