AUDIT PROGRAM
CLIENT: ______
PERIOD: ______
SUBJECT: TRADE DEBTS
Est. Hrs. / Phase/Level /Procedure
/ W/P Ref. / By / Comments/ExplanationsAUDIT OBJECTIVES
To determine whether:A. / Receivables represent all amounts owed to the entity at the balance sheet date and have been properly recorded.
B. / The allowances for doubtful accounts, returns and allowances and discounts are adequate but not excessive.
C. / Receivables are properly described and classified and adequate disclosures with respect to these amounts (including disclosures of amounts that have been pledged, discounted or sold with recourse or are with related parties) have been made.
SUBSTANTIVE PROCEDURES
1. Overall Analytical Review
1.1 / Using a carry forward Prepared By Client (PBC) schedule, obtain explanations for significant variations in account balances and aging, days sales in account receivable (A/R) and % of allowance for doubtful accounts to total accounts receivable between this year and last year.
1.2 / Review nature of all significant receivables. Discuss collectibility and classification with client.
1.3 / Compare the balance of each significant receivable account with the comparable balance for the preceding period. Investigate significant or unusual fluctuations.
1.4 / Compute the receivables turnover ratio (average receivables to net revenues) for the current period. Compare with the comparable ratio for the preceding period and consider its reasonableness in relation to revenue volatility, credit policy, collectibility, etc. Investigate significant or unusual fluctuations.
1.5 / Compute the average number of days of revenues in receivables for the current period. Compare with the comparable ratio for the preceding period and with industry statistics. Investigate significant or unusual fluctuations.
2. Subsidiary Records
2.1 / Have the client prepare a reconciliation of the receivables subsidiary ledger to the general ledger control accounts as of the circularization or balance sheet date. Verify the clerical accuracy of the reconciliation.
2.2 / Trace control account totals to the general ledger and subsidiary ledger totals to their source.
2.3 / Examine supporting documentation for significant or unusual reconciling items. (Scope/Sample).
2.4 / Foot or test foot the subsidiary ledger to ensure that all record receivables balances are included in the totals.
2.5 / Scan the subsidiary ledger for unusual balances or amounts (e.g. credit balances, amounts due from related parties, etc.). Investigate and examine supporting documentation, as appropriate. Consider including such accounts in the circularization Scope/Sample: ( ).
2.6 / Clerically test accounts receivable trial balance. (Scope/Sample: ______.)
3. Circularization
3.1 / Select a sample of accounts receivable from the detailed trial balances for confirmation and consider the manner in which confirmation should be circularized by adopting a positive form of confirmation.[Scope:
o Balances over Rs. ______to provide ______% coverage, and/or
o Representative sample of ______balances selected from the population.
o Make pareto analysis of population and make circularization in a positive form to balances which constitute 80% of the total balances].
3.2 / If statistical sampling is used, indicate:
o Statistical method: ______
o Confidence level: ______%
o Tolerable error: Rs. ______
Consider using Microstart Sampling.
3.3 / Document sampling rationale (if not already documented in planning), including the sample size, coverage % (if appropriate) and tolerable error.
3.4 / If debtors are circularized at the date other than the balance sheet date, then consider applying the alternate modified procedures.
3.5 / Verify on a test basis the addresses supplied by the client for circularization and cross check them with invoices, correspondence etc.
3.6 / Insist that confirmation be provided of the addressee company duly signed and stamped by the addressee company. However, the other modern means of receiving confirmation like e-mails etc., are acceptable where the control environment is good. Provided these are received at firm’s official e-mail address.
3.7 / Have the client prepare confirmation requests. Obtain requests and prepare confirmation control. Send first requests. Retain copies.
3.8 / Follow-up on confirmation requests and send second and third requests as required.
3.9 / Upon receiving confirmation replies, update the confirmation control and file the replies as clean; clean, with gratuitous comments; and exceptions.
3.10 / Have client reconcile exceptions (consider using standard reconciliation form . Verify the clerical accuracy of the reconciliations and review for completeness. Examine support for reconciling items. (Scope/Sample: ______).
3.11 / Prepare a summary of the circularization results, including confirmation coverage, responses by type and exceptions.
3.12 / Indicate the likely error. If a representative sample was selected, likely error is based on a projection of the sample results.
3.13 / Conclude on the results of the circularization.
4. Confirmations not sent on Client’s Request
4.1 / For any confirmations that client personnel request not to be sent, investigate the business reason for the client’s request and evaluate it.4.2 / If the business reason given is not satisfactory and the account is significant, discuss the request with, and obtain the approval of, the chief financial or chief executive officer.
4.3 / Determine that management has no objections to reporting the request to the audit committee or board.
4.4 / Verify the balances by examining critical forms and documents ( ) to support transactions and subsequent cash collections.
5. Realization and other alternate procedures
5.1 / For non-replies, RPOs (returned by post office) perform procedures in lieu of circularisation of debtors or customers.
5.2 / Review accounts receivable trial balance for large/unusual items.
5.3 / Have the client list subsequent cash collections for all invoices over Rs.______. Trace subsequent collections to the cash receipts records. (Scope/Sample: ______). Ensure that subsequent collections are against the balances as at the balance sheet date.
5.4 / Examine sales invoices and shipping documents for unpaid amounts included in the balance. (Scope/Sample: ______.)
5.5 / Consider the collectibility of significant unpaid balances, especially RPOs.
5.6 / Review movement in accounts during the previous year giving particular attention to the identification of long unpaid invoice or unadjusted invoices/discounts etc.
6. Foreign currency balances
6.1 / Ensure that all receivables in foreign currencies, are re-translated at the exchange rate prevailing on the balance sheet date.
6.2 / Ensure that hedge accounting practices in accordance with IAS-39 have been followed with regard to any balances covered under forward exchange contracts.
6.3 / Have the client prepare a schedule of re-translation, from rate at initial recognition and at balance sheet date, of all receivables. Cross-refer exchange differences with financial charges/other income.
6.4 / Where the company uses forward exchange contracts, such contracts should be accounted for as assets and liabilities. Gains and losses on such financial instruments used for hedging of foreign currency transactions should be recognized as income and expense on the same basis as the corresponding hedged item. Foreign exchange contracts are translated at exchange rates prevailing at the balance sheet date (representing their fair value).
7. Credit and Discounts policy
7.1 / Check whether the receivable balances exceed the allowed credit period and proper follow-up is made in case when a receivable exceeds the allowed credit period.
7.2 / Review the client’s current policies regarding sales discounts, returns and allowances. Examine selected sales contracts to verify return policies and terms. Identify changes from the prior period and evaluate the effect of these changes.
7.3 / Ensure that any amounts of discounts/bonuses awarded subsequently based on the sales for the period have been adequately accounted for in current period.
7.4 / Ensure appropriate allowance for sales returns and review sales returns subsequent to year-end to ensure that no exceptionally major return has occurred subsequent to year-end which has not been provided for.
8. Provision for Doubtful Debts and Aging Analysis
8.1 / Evaluate the following items and their impact on our review of the adequacy of the allowance for doubtful accounts. Document in a memorandum your findings related to:
· Changes in the client’s credit and collection policies that have occurred during the audit period, including changes that have since been reversed or modified;
· Impact of new products or new markets and whether they involve a different, higher-risk customer;
· General economic conditions and trends adversely affecting the client’s customers;
· Other ratios, trends or relationships that are unique to the client or its industry which relate to receivables valuation; and
· Changes in methods, definitions or criteria for aging accounts that might affect comparability of the data.
8.2 / Have the client prepare an analysis of the allowance for doubtful accounts for the current audit period. Verify the clerical accuracy of the analysis.
8.3 / Cross-reference the provision for the current period to the appropriate expense lead schedule.
8.4 / Compare the provision, write-offs, recoveries and the ending balance for the current period with the comparable amounts for the preceding audit period. Investigate significant or unusual fluctuations.
8.5 / Review the listing of accounts written-off and reconcile the totals with the amounts charged to the allowance for doubtful accounts. Trace such amounts in the accounts receivable subsidiary records in order to ensure that the provisions exist against valid receivables only.
8.6 / Determine whether proper approvals were obtained for selected write-offs. Scope/Sample:( ).
8.7 / Obtain a copy of the client’s aging of receivables and ensure that the analysis data is extracted from the same integrated system from which the carrying amounts are determined.
8.8 / Test the clerical accuracy of footings and cross footings of aging analysis. (Scope/Sample: ( ).
8.9 / Compare the aging statistics with those of prior periods. Investigate significant trends or fluctuations.
8.10 / Trace the aging information for selected accounts to subsidiary ledgers and to supporting critical forms and documents ( ). Concentrate the test on accounts reflected as “current”. Recalculate the aging of the account balances. Scope/Sample: ( ).
8.11 / Be alert for receivables that should be written off, under the client’s criteria.
8.12 / Have the client prepare a listing of individual large and/or past due receivables for specific review of their probable collectibility. The client’s evaluation of each receivable and subsequent cash collections should be indicated on the schedule. Scope/Sample: ( ).
8.13 / Relate the totals of individual receivables listed to the client’s aging of receivables. Ensure that significant past due receivables are not omitted from the listing.
8.14 / Identify any customers with “locked-in” receivable positions and consider the implications thereof.
8.15 / Discuss the accounts with informed client personnel to obtain additional background information.
8.16 / If additional work is necessary to satisfy yourself regarding the probable collectibility of an unpaid balance, consider the following:
· Review credit and collection files and the debtor’s or customer’s financial statements; and
· Obtain reports of credit bureaus or credit reporting companies.
9. General Allowance for Doubtful Receivables
9.1 / Identify a range of specific allowances required for the total individual receivables reviewed.
9.2 / Calculate the percentages of the allowance for doubtful accounts to total receivables and to receivables aged over 60 days. Compare with similar percentages for prior periods. Investigate significant fluctuations or trends.
9.3 / Calculate the percentage of accounts written-off to credit sales and average receivables for the period. Compare with the similar percentages for prior periods. Investigate significant fluctuations or trends.
9.4 / Calculate the percentage of the provision for doubtful accounts to gross sales. Compare with the similar percentage for prior periods and with industry statistics. Investigate significant fluctuations or trends.
9.5 / Based upon the above percentages, the review of the aging and historical write-off statistics, identify a range of general allowances required for receivables not specifically reviewed above.
9.6 / Summarize the results of our specific and general review of the collectibility of receivables and determine an acceptable range of adequacy of the allowance for doubtful accounts. Adjust the identified range for other factors identified above that influence the collectibility of receivables.
9.7 / Compare the balance of the allowance for doubtful accounts as of the balance sheet date with the acceptable range determined above. Propose an adjustment, as appropriate, to ensure that the allowance falls within the acceptable range.
10. Secured Receivables
10.1 / Check agreements with parties on test basis to ensure the reliability of the amount being disclosed as secured
10.2 / Check the value of such security.
10.3 / Check the amount of secured balances on party to party basis and compare the carrying amount with secured amount.
10.4 / Physically verify the assets charged.
11. Pledge, Discounting and Securitization
11.1 / Inquire as to whether any receivables have been sold or discounted. Review the terms of each such transaction and determine whether it should be recorded as a sale or loan. Review the client’s entry to record the transaction for propriety and test the calculation of any gain or loss.
11.2 / For receivables sold or discounted with recourse, confirm the existence of the agreement (or its principal terms) and the amounts sold with the purchaser.
11.3 / Compare the amounts confirmed with the financial statement disclosure of the contingent liability.
11.4 / Consider whether any allowance for recourse is required.
11.5 / For receivables sold without recourse, confirm the agreement (or its principal terms) and the status of any receivable balances retained by the seller. [Consider using Emerging Issues Task Force EITF 18-88 for establishment of criteria].
Other tests as deemed necessary
Management Letter
Prepare management letter points including:
· Internal control weaknesses;
· Business improvement opportunities;· Legal non-compliance;
· Accounting system deficiencies; and
· Errors and irregularities not material at the financial statements level.
Disclosure
Ensure appropriate disclosure in accordance with the reporting framework and fill relevant portion of FSDCL.Supervision, review and conclusion
1. / Perform Senior review and supervision.2. / Resolve Senior review points.
3. / Resolve Partner and Manager review points.
4. / Conclude response to the audit objectives.
Audit conclusion
Based on the substantive test procedures, I/we performed as outlined above, it is my/our opinion that the audit objectives set forth at the beginning of this audit program have been achieved, except as follows:
______
______
______
______
Date:______Signature Job Incharge Manager Partner
Page: 2/10