Trade Receivables

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Trade Receivables Audit Case Example: ABC Manufacturing Company

Context

ABC Manufacturing Company has a diversified customer base, leading to a significant amount of trade receivables. Given the risk of customer default and disputes over goods and services provided, the audit of trade receivables is crucial for ensuring that reported receivable balances are accurate and collectible.

Audit Objective

To obtain reasonable assurance that trade receivables recorded in ABC Manufacturing Company’s financial statements exist, are owned by the company, are complete, accurately valued, and properly presented and disclosed in accordance with the applicable financial reporting framework.

Types of Audit Evidence and Documentation for Trade Receivables Assertions

1. Existence

• Case: Verify the existence of recorded receivables by confirming balances directly with customers or through other external confirmation procedures.

• Documentation: Document the selection of accounts for confirmation, the process of sending and receiving confirmations, and the evaluation of responses received, including any discrepancies identified.

2. Rights and Obligations

• Case: Confirm that ABC Manufacturing Company has the rights to the recorded receivables and that the obligations arising from sales transactions rest with the customers.

• Documentation: Summarize the review of sales contracts and agreements to verify the company’s rights to payment and obligations related to trade receivables.

3. Completeness

• Case: Ensure that all receivables arising from sales transactions are recorded in the financial statements.

• Documentation: Outline procedures for testing completeness, such as reconciling sales ledgers to the general ledger and reviewing subsequent cash receipts.

4. Valuation and Allocation

• Case: Assess the valuation of trade receivables, including the adequacy of allowance for doubtful accounts based on the company’s historical collection experience and current economic conditions.

• Documentation: Document the analysis of the allowance for doubtful accounts, including aging analyses, assessment of credit risk, and any specific provisions for known disputes or financial difficulties of customers.

5. Presentation and Disclosure

• Case: Review the financial statements to ensure that trade receivables are correctly classified, described, and disclosed, including the disclosure of the credit risk management policies and the aging of receivables.

• Documentation: Note the evaluation of trade receivables disclosures, verifying the accuracy of the amounts reported and the adequacy of disclosures related to credit risk and the allowance for doubtful accounts.

6. Assessment of Internal Controls over Trade Receivables

• Case: Evaluate the design and implementation of internal controls over the recognition, measurement, and collection of trade receivables.

• Documentation: Document the review of internal controls related to trade receivables, identifying any control deficiencies and their implications for the audit strategy.

7. Inquiries and Analytical Procedures

• Case: Perform inquiries with the sales and finance departments regarding the recognition of sales and the management of receivables. Apply analytical procedures to identify unusual or unexpected trends in receivable balances.

• Documentation: Summarize inquiries and the results of analytical procedures, highlighting any significant trends, discrepancies, or areas requiring further investigation.

8. Communication with Management and Those Charged with Governance

• Case: Discuss significant findings related to the audit of trade receivables with management and those charged with governance, especially any issues impacting the valuation of receivables or adequacy of disclosures.

• Documentation: Prepare a summary of communications regarding trade receivables, including management’s responses to audit findings and any adjustments or disclosures resulting from the audit.

Conclusion

The audit of trade receivables is essential for ensuring that the reported receivable balances are accurate, collectible, and properly disclosed. Documenting the audit procedures and findings related to each assertion for trade receivables provides a basis for the auditors’ opinion on the financial statements and enhances the reliability of the information provided to stakeholders. This detailed approach helps stakeholders understand the company’s credit risk and cash flow expectations.