Question

What should you do in this situation? You are auditing a client's account receivable balances. Verification letters have been sent to 50 (or 10% of the customers woth those balances) which equals around 8% of the accounts receivable balance. Confirmations from 42 of the customers confirms 80% of the balance is correct. The missing 8 have 2 important accounts with large balances. You have checked those 2 customers and determined they always pay on time.

Do you need to do additional audit work for this situation? If so, what are your concerns and what additional evidence should you gather?

Answer 1

Auditors may do following additional work :-

a) They may also measure the average collection period. If so, expect them to make inquiries about the reasons for changes in the trends.

b) Related party receivables. If there are any related party receivables, the auditors may review them for collectibility.

c) Assess bill and hold sales. If you have situations where you are billing customers for sales despite still retaining the goods on-site (known as "bill and hold"), the auditors will examine your supporting documentation to determine whether a sale has actually taken place.

d) Match invoices to shipping log. The auditors will match invoice dates to the shipment dates for those items in the shipping log, to see if sales are being recorded in the correct accounting period. This can include an examination of invoices issued after the period being audited, to see if they should have been included in a prior period.

Auditors should also obtain evidence of :-

a) The auditors will review a selection of the credit memos issued during the audit period to see if they were properly authorized, whether they were issued in the correct period, and whether the circumstances of their issuance may indicate other problems. They may also review credit memos issued after the period being audited, to see if they relate to transactions from within the audit period.

b) Review receiving log. The auditors will review the receiving log to see if it records an inordinately large amount of customer returns after the audit period, which would suggest that the company may have shipped more goods near the end of the audit period than customers had authorized.