Chapter 13

Receivables

Receivables (ERCV)
Existence
The receivable actually exists which is confirmed by the
receivable replying to the receivables confirmation.
Rights and obligations
The receivable belongs to Co. The receivable confirms
that the amount is owed to Seeley again by replying to
the confirmation.
Valuation and allocation
Receivables are included in the financial statements at
the correct amount the receivable will dispute any
amounts that do not relate to that account.
Cut-of
Transactions and events have been recorded in the
correct accounting period. The circularization will identify
reconciling items such as sales invoices/cash in transit.

Receivables
Receivables circurlization
Assuming receivables are material it is important
that receivable circurlization will be carried out. This
means writing to the customer and asking them to
verify the balance.
This is good for the extremely good for the checking
the existence of the receivable and its accuracy. It
could well be that the customer who is in trouble will
verify that receivables exist so as to play the time
they dont want to arose suspious and quite a
separate valuation exercise has to be done letter.
There are two types of circurlization
Positive
Negative

Positive and Negative circularization

Positive circularization
In a positive circularization you want a reply from
everyone who has been written to , whether or not
they agree with the balance.
Two option are there:
Write the balance and ask confirmation
Send a blank letter and ask them to write the
balance
Negative circularization
In the negative circularization you ask for a reply
only if the balance if out of agreement. But how do
you know if you do not get a reply whether or not
that person agree with balance or whether they
simply have not bothered replying.

Receivables

Circularization letter have to be written on the clients

notepaper and signed by the client. This gives the
customer permission to disclose confidential information
to the auditor. Here if the customer of clients replied to
the client , the client could simply through away those
letters which shows disagreement and pass all those
letters which show agreement. That would give the
auditor quite a wrong impression of the accuracy of the
receivables.
Very often stratification will allow a large % of the
receivables balance to be covered by relatively writing
few letters. Perhaps the key account of the client will
account for 80% of the receivables balance. In addition
some of the balances will be selected at random for
circularization , together with those balances which has
removed for some time , credit balances and perhaps nil
balances.

Receivables
The auditor has to keep a careful schedule of
customer written , replies received, where replies
agree and where they do not agree , where the lack
of agreement could simply be explained by timing
difference on payments.
If some of the client customer do not reply then it is
normal for the auditor to follow up the original
letter by letter on the auditor notepaper. If the
auditor is really worried about the balance for which
there is no confirmation received the auditor
might , as a last resort phone that customer.
However this can only be done with client
permission. One of the last things auditor should be
doing it to poison the relationship between client
and customer.

Receivables

Through stratification a large proportion

of account receivables can be covered.
Particular categories of receivables
might be chosen for the sample.
1) Large or material items.
2) Negative balances
3) Nil balances
4) Long Outstanding Receivables
5) Remaining randomly selected

Other work on Receivables (RAC)

1.Reconcile the some of balance on the receivables
ledger to the control account. The individual balance
represent the individual asset and they have to be
reflected in the control accounts which in turn is
what appears in the financial statements.
2.Age listing These are essential for receivables
valuation. Very old debts are unlikely to be paid and
quite often a general provision of irrecoverable debt
is calculated based on the age of debts.
3. Correspondence with the customers should
be scrutinized . It may become clear that a customer
disputes an invoice and it will be difficult ever to
receive that amount of money, they might be
denying the goods were received. They might be
disputing the quality of goods.

Other work on Receivables

4. Collection period , that the number of days

debtor period calculated it is usually regarded as
very sensitive indicator as to the recoverability of the
of receivables and also the efficiency of credit control
operations. They may off course be good reason why
credit collection period increases: the company
might have increased the terms of sale to be
competitive or it may be making a greater
proportion of sales abroad where usually the
collection period is longer. But all other things being
equal , an increase in the collection period is usually
regarded as bad news.
5.Scrutiny of board minutes: large receivables
which look as though they might be going bad should
be reflected in the board discussion and there should
be records of that in board minutes.

Other work on Receivables

6. Wait if possible , for payment. Finally an absolute
proof that receivable is good , is if it is received after
year end. Quite often if there is a material amount of
due , auditors will try and delay singing the auditor
report until the amount is received. If it is not received
may be after two or three months then , then there may
be serious doubts as to the recoverability of that
amount and some sort of provision is be set up.
7. Scrutiny of credit notes issued after the year
end is very important. If is possible for the company to
debit and receivable account and credit sales just
before the year end and then very early in the new year
to reverse that transaction by issuing credit notes. This
gives the company a mechanism to boost up its income
and profit for the year which is then quietly reversed
out.

Other work on receivables

8) Select a sample of goods dispatched notes
(GDN) before and just after the year end and follow
through to the sales invoice to ensure they are
recorded in the correct accounting period: verifies
completeness and existence (cutoff of revenue).
9) Review a sample of post yearend credit notes to
identify any that relate to pre yearend transactions
to ensure that they have not been included in
receivables: verifies existence (occurrence of
revenue).
10) Select a sample of yearend receivable
balances and agree back to valid supporting
documentation of GDN and sales order: verifies
existence.

Other work on receivables

Review after date cash receipts and

follow through to pre yearend receivable
balances
Calculate average receivable days and
compare this to prior year, investigate
any significant differences
Inspect the aged receivables report to
identify any slow moving balances,
discuss these with the credit control
manager to assess whether an allowance
or write down is necessary

Practice question
You are the audit manager in charge of the audit of
Builders Mate, a limited liability company. The
companys year end is 31 March, and Builders Mate has
been an audit client for three years. Builders Mate sells
small tools, plant and equipment exclusively to the
building trade.
They have 12 warehouse style shops located
throughout the country. Builders Mate does not
manufacture any products themselves. The audit
fieldwork is due to commence in 3 weeks time and you
are preparing the audit work programme for the trade
receivables section of the audit. Extracts from the
clients trial balance show the following information.
Trade receivables control account
124,500
General trade receivables provision
(2,490)
Specific trade receivables provision
0

Practice question
From your review of last years audit file you have
determined that last year there were 2 specific
provisions of $5k and $2k as well as a 3% general
provision.
Initial conversations with the client indicate that there
are no specific provisions that are to be made this year
however they intend to reduce the general provision
from 3% to 2%. You are aware that two of Builders
Mates major customers went into administration
during the year and they are likely to be liquidated in
the near future. Both of these customers owed
material amounts at the yearend.
Required
Describe substantive procedures the auditor should
perform on the yearend trade receivables of Builders
Mate.

Practice question (Answer)

1)

Trace and agree the receivables balances on the trial balance

to Builders Mates accounting system and the draft financial
statements.
2) Confirm the trade receivables control account balance matches
the sum of the individual trade receivables ledger accounts.
3) For a sample goods dispatched notes around the yearend trace
to the sales invoice and ledger accounts to ensure that the
transactions have been recorded in the correct accounting
period.
4) Cast a sample of trade receivable ledger accounts to confirm
arithmetical accuracy.
5) Select a sample of individual trade receivables and perform a
direct confirmation test using a positive confirmation letter.
6) Recalculate the general provision based on the 2% figure to
ensure arithmetical accuracy.
7) Discuss with the Builders Mate management why the general
provision has reduced from 3% to 2% and assess the
reasonableness of the explanations provided

Practice question (Answer)

Obtain or prepare an aged receivables analysis to

identify aged debts that may require a specific provision.
Discuss with management any such balances and ensure
specific provisions are made if appropriate.
Trace and confirm that the specific provisions made in the
prior year were either written off or the cash was
recovered in the current accounting period.
Discuss with management the reason for not making
specific provisions for the two customers in administration
who owe material amounts at the yearend.
Consider and discuss with management the potential
implications of failing to make specific provisions on the
audit opinion.
Compare a sample of individual trade receivables to their
prior year balance and investigate any unusual or
unexpected changes between the balances.

Definition
Accounts Receivable Daysis an accounting concept related to
Accounts Receivable. It is the length of time it takes to clear all
Accounts Receivable, or how long it takes to receive the money
for goods it sells. This is useful for determining how efficient the
company is at receiving whatever short-term payments it is
owed.
Average accounts receivable
Annual sales 365 days
Receivable aging analysis
f an accounts receivable aging demonstrates that a company's
receivables are being collected much slower than normal, this is
a warning sign that business may be slowing down or that the
company is taking greater credit risk in its sales practices.
As a management tool, accounts receivable aging may indicate
that certain customers are not good credit risks. It can therefore
help a company make prudent decisions about whether or not to
keep doing business with customers that are chronically late
payers.

Definition

List of balances
Sale day book
Sales / receivable ledger control account
Entry is made in the financial statements