Audit on Receivables

Audit Objectives
To determine that:
1. Receivables represent valid claims against customers and other
parties and have been properly recorded
2. The related allowances for doubtful accounts, returns and
allowances, and discounts are reasonably adequate
3. Receivables are properly described
4. Disclosures with respect to the accounts are adequate
Audit Procedures
1. Obtain a list of aged accounts receivable balances from the
subsidiary ledger, and:
◦ Foot and cross-foot the list
◦ Check if the list reconciles with the general ledger control account
◦ Trace individual balances to the subsidiary ledger
◦ Test the accuracy of the aging
◦ Adjust non- trade accounts erroneously included in customers’ accounts
◦ Investigate and reclassify significant credit balances

2. Test accuracy of balances

Audit Procedures
3. Confirm accuracy of individual balances by direct communication with
customers
◦ Investigate exceptions reported by customers and discuss with appropriate
officer for proper disposal
◦ Send a second request for positive confirmations requests without any replies
from customers
◦ If the second request does not produce a reply from the customer, perform
extended procedures, like:
Reviewing collections after year-end
Checking supporting documents
Discussing the account with appropriate officer
Audit Procedures
oDiscuss with appropriate officer, confirmation requests returned by the post
office and perform extended procedures
oPrepare a summary of confirmation results

4. Review correspondence with customers for possible adjustments

5. Test propriety of cutoff
◦ Examine sales recorded and shipments made a week before and after the
end of the reporting period and ascertain whether the sales were recorded
in the proper period.
◦ Investigate large amounts of sales returned shortly after the end of the
reporting period
Audit Procedures
6. Perform analytical procedures, like:
◦ Gross profit ratio
◦ Accounts receivable turnover
◦ Ratio of accounts written off to sales or balance of accounts
receivable
◦ Compare with prior year and industry averages
7. Review individual balances and age of accounts with appropriate
officer, and:
◦ Determine the accounts that should be written off
◦ Determine adequacy of allowance for doubtful accounts
Audit Procedures
8. Obtain analyses of significant other receivables
9. Ascertain whether some receivables are pledged, factored, discounted
or assigned
10. Determine propriety of financial statement presentation and adequacy
of disclosures
11. Obtain receivable representation from client