Procedures on Specific Areas
Substantive on Receivables Key risk: overstatement
Receivables circularization (3rd party confirmation of receivables)
Types of receivable confirmation letters
1. Positive confirmation: Receivable asked to agree or disagree with the stated balance or write the
balance owing.
2. Negative confirmation: Receivable asked to reply only if he disagrees with the balance. This type of
confirmation should only be used when:
The audit client has a strong internal control system over sales and trade receivables.
Other good corroborative evidence with regard to the existence of trade receivables has already
been obtained from other tests carried out.
There are a large number of small balances.
A substantial number of errors is not expected.
Method of sending confirmation letter
1. Select a sample of debtors to be circularized
2. Inform the client of the intended list.
3. Get the details of the debtors and prepare letters on client’s letterhead.
4. Get the letter signed by a senior person at the client.
5. Record names and amount circularized
6. Post/fax letters ensuring the replies are sent directly to the auditor.
7. Record replies received and test the ones not agreed.
8. For non-replies:
- With the client’s permission, the team should arrange to send a follow up circularisation.
- If the receivable does not respond to the follow up, then with the client’s permission, the senior
should telephone the customer and ask whether they are able to respond in writing to the
circularisation request.
- If there are still non-responses, then the auditor should undertake alternative procedures to
confirm receivables. These procedures include verifying post year end receipts from that
customer, verifying order placement and dispatch documentation and carrying out bad debt
procedures
Page | 98
,9. For responses with differences:
i. The auditor should identify any disputed amounts, and identify whether these relate to timing
differences or whether there are possible errors in the records of the client.
ii. Any differences due to timing, such as cash in transit, should be matched with cash received after
the year end
iii. The receivables ledger should be reviewed to identify any possible mispostings as this could be a
reason for a response with a difference.
iv. If any balances have been flagged as disputed by the receivable, then these should be discussed
with management to identify whether a write down is necessary
Substantive testing
Existence 1. Circularization of a sample of period end receivables (discussed above)
2. Verify audit trail from records to source document: Select a sample of
The receivable actually year-end receivable balances and agree back to valid supporting
exists documentation of GDN and sales order to ensure existence
Accuracy, valuation, 1. Circularization of a sample of period end receivables (discussed above)
allocation 2. Invoice: inspect and recalculate
3. Recoverability procedures (bad debts):
Receivables are Select a significant sample of receivables and review whether there
included in the are any after date cash receipts (ensure that a sample of slow
financial statements at moving/old receivable balances is also selected)
the correct amount Review the aged receivable ledger to identify any slow moving or
old receivable balances, discuss the status of these balances with
the credit controller to assess whether they are likely to pay
Calculate average receivable days and compare this to prior year,
investigate any significant differences
Review customer correspondence to identify any balances which
are in dispute or unlikely to be paid.
Review board minutes to identify whether there are any significant
concerns in relation to payments by customers.
4. Allowance for doubtful debts:
recalculate to ensure it is accurate
ensure rationale/basis reasonable and in line with your
understanding of the client’s business
written representation from management that the
basis/assumptions are reasonable and that the allowance is
adequate.
-Inspect post year-end sales returns/credit notes and consider
whether an additional allowance against receivables is required.
Page | 99
, Rights & obligation 1. Circularization of a sample of period end receivables (discussed above)
2. Invoice: inspect to confirm right over the receivable
The receivable belongs
to the client
Completeness 1. Verify audit trail from source document to record:
Select a sample of GDNs and agree to valid supporting
There has been no documentation of invoice.
omission in recording Ensure these invoices have been entered in the individual ledgers.
of receivables 2. Compare ratios/balances of this period to prior periods and budgets,
investigate any significant differences.
3. Ensure all disclosures relevant to receivables have been made.
SALES/REVENUE
1. Select a sample of invoices:
a) Recalculate them to confirm their arithmetical accuracy.
b) Recalculate discounts to ensure accuracy.
c) Match rates/prices to standard price list to confirm accuracy
2. Completeness: Select a sample of trade customer orders placed and agree these to the despatch
notes and sales invoices through to inclusion in the sales ledger to ensure completeness of revenue.
3. Cut-off: Note down the last GDN for the year. Take a sample of GDNs immediately before AND after
the year end and ensure they are recorded in the correct accounting period
Analytical Procedures on Revenue
4. Compare the overall level of revenue against prior years and discuss the reasons with management
and agree to supporting documentation.
5. Compare the overall level of revenue against the budget for the year and investigate any significant
fluctuations.
6. Obtain a schedule of sales for the year disaggregated into main product lines and compare this to
the prior year breakdown and budget to understand what impact the new products have had on
revenue. For any unusual movements, discuss with management.
7. Perform a proof in total calculation for revenue. The prior year revenue should be taken and an
adjustment should be made for any new products or new stores. This expectation should be
compared to actual revenue and any significant fluctuations should be investigated.
8. Calculate the gross profit margin for the company and compare this to the prior year and investigate
any significant fluctuations
Page | 100
Substantive on Receivables Key risk: overstatement
Receivables circularization (3rd party confirmation of receivables)
Types of receivable confirmation letters
1. Positive confirmation: Receivable asked to agree or disagree with the stated balance or write the
balance owing.
2. Negative confirmation: Receivable asked to reply only if he disagrees with the balance. This type of
confirmation should only be used when:
The audit client has a strong internal control system over sales and trade receivables.
Other good corroborative evidence with regard to the existence of trade receivables has already
been obtained from other tests carried out.
There are a large number of small balances.
A substantial number of errors is not expected.
Method of sending confirmation letter
1. Select a sample of debtors to be circularized
2. Inform the client of the intended list.
3. Get the details of the debtors and prepare letters on client’s letterhead.
4. Get the letter signed by a senior person at the client.
5. Record names and amount circularized
6. Post/fax letters ensuring the replies are sent directly to the auditor.
7. Record replies received and test the ones not agreed.
8. For non-replies:
- With the client’s permission, the team should arrange to send a follow up circularisation.
- If the receivable does not respond to the follow up, then with the client’s permission, the senior
should telephone the customer and ask whether they are able to respond in writing to the
circularisation request.
- If there are still non-responses, then the auditor should undertake alternative procedures to
confirm receivables. These procedures include verifying post year end receipts from that
customer, verifying order placement and dispatch documentation and carrying out bad debt
procedures
Page | 98
,9. For responses with differences:
i. The auditor should identify any disputed amounts, and identify whether these relate to timing
differences or whether there are possible errors in the records of the client.
ii. Any differences due to timing, such as cash in transit, should be matched with cash received after
the year end
iii. The receivables ledger should be reviewed to identify any possible mispostings as this could be a
reason for a response with a difference.
iv. If any balances have been flagged as disputed by the receivable, then these should be discussed
with management to identify whether a write down is necessary
Substantive testing
Existence 1. Circularization of a sample of period end receivables (discussed above)
2. Verify audit trail from records to source document: Select a sample of
The receivable actually year-end receivable balances and agree back to valid supporting
exists documentation of GDN and sales order to ensure existence
Accuracy, valuation, 1. Circularization of a sample of period end receivables (discussed above)
allocation 2. Invoice: inspect and recalculate
3. Recoverability procedures (bad debts):
Receivables are Select a significant sample of receivables and review whether there
included in the are any after date cash receipts (ensure that a sample of slow
financial statements at moving/old receivable balances is also selected)
the correct amount Review the aged receivable ledger to identify any slow moving or
old receivable balances, discuss the status of these balances with
the credit controller to assess whether they are likely to pay
Calculate average receivable days and compare this to prior year,
investigate any significant differences
Review customer correspondence to identify any balances which
are in dispute or unlikely to be paid.
Review board minutes to identify whether there are any significant
concerns in relation to payments by customers.
4. Allowance for doubtful debts:
recalculate to ensure it is accurate
ensure rationale/basis reasonable and in line with your
understanding of the client’s business
written representation from management that the
basis/assumptions are reasonable and that the allowance is
adequate.
-Inspect post year-end sales returns/credit notes and consider
whether an additional allowance against receivables is required.
Page | 99
, Rights & obligation 1. Circularization of a sample of period end receivables (discussed above)
2. Invoice: inspect to confirm right over the receivable
The receivable belongs
to the client
Completeness 1. Verify audit trail from source document to record:
Select a sample of GDNs and agree to valid supporting
There has been no documentation of invoice.
omission in recording Ensure these invoices have been entered in the individual ledgers.
of receivables 2. Compare ratios/balances of this period to prior periods and budgets,
investigate any significant differences.
3. Ensure all disclosures relevant to receivables have been made.
SALES/REVENUE
1. Select a sample of invoices:
a) Recalculate them to confirm their arithmetical accuracy.
b) Recalculate discounts to ensure accuracy.
c) Match rates/prices to standard price list to confirm accuracy
2. Completeness: Select a sample of trade customer orders placed and agree these to the despatch
notes and sales invoices through to inclusion in the sales ledger to ensure completeness of revenue.
3. Cut-off: Note down the last GDN for the year. Take a sample of GDNs immediately before AND after
the year end and ensure they are recorded in the correct accounting period
Analytical Procedures on Revenue
4. Compare the overall level of revenue against prior years and discuss the reasons with management
and agree to supporting documentation.
5. Compare the overall level of revenue against the budget for the year and investigate any significant
fluctuations.
6. Obtain a schedule of sales for the year disaggregated into main product lines and compare this to
the prior year breakdown and budget to understand what impact the new products have had on
revenue. For any unusual movements, discuss with management.
7. Perform a proof in total calculation for revenue. The prior year revenue should be taken and an
adjustment should be made for any new products or new stores. This expectation should be
compared to actual revenue and any significant fluctuations should be investigated.
8. Calculate the gross profit margin for the company and compare this to the prior year and investigate
any significant fluctuations
Page | 100
