Question

What are some of the challenges auditors face when auditing accounts receivable. What are some of the significant risks of material misstatement for accounts receivable?

Answer 1

Accounts receivables are vital components of any business as it has direct connection and impact upon reporting of revenues for the period. Therefore, its necessity to be audited enhances even more. In today's digital age and out of the box approach to accounting, challenges for auditors while auditing accounts receivable are multi-faceted. Efficiency and effectiveness are the core requirements to manage the auditing of accounts receivables as the volumes of these may be huge in business setting. Some of the prominent challenges faced by auditors are as under :-

1. Line of separation of duties :- An auditor needs to clearly understand the line of division between various functions associated right from raising an invoice till collection and recording of the same. Many a times in a business environment, credit policies are in place but implementation reality on ground may be different. The authority structure of personnel involved in accounting of an accounts receivable may not be presented to an auditor with clear demarcation. This poses risk of material misstatement while auditing accounts receivable.

2. Year end accounting adjustments :- At the end of reporting periods, if there are any invoices raised but checks not issued, those transactions need to be scrutinized closely so as to avoid risk of incorrect revenue reporting. There may be loopholes present in the system which may allow the business to understate assets and revenue by inflating provision for doubtful debts or by postponing the accounting for credit sale by post dating the invoices and other malpractices. Auditors face a serious challenge if the senior management is also privy to it.

3. Completeness :- Auditor is able to testify the records presented but he wont be able to testify something non existent in records. So, if any occurence has escaped accounting the records will tend to be incomplete thereby posing risk of incompleteness before the auditor.

4. Valuation Risk :- Business is supposed to assess collectibility of the amount due from debtors on a net realizable value basis. Reporting in fair manner requires accurate valuation of accounts receivables. Accounts receivables may be composed of different nature of credit terms and transactions which may pose valuation risk for an auditor.