AUDT 371 - DETAILED AUDIT PROCEDURES - DEBTORS

F/S assertion - Rights

• Determine whether accounts receivables have been ceded or encumbered by inspection of:
o minutes of directors' meetings
o loan agreements
o bank confirmations
• Enquiry to management of entity whether receivables have been factored, ceded, or
encumbered, include in management representation.
• If ceded or encumbered, ensure it is properly disclosed in the financial statements.

F/S assertion - Existence

a) Debtors' circularisation
i. Positive vs Negative debtor circulation
➢ Positive debtors' circularization - Request that the debtor confirms with the auditor
whether the balance on the statement is correct or not (good evidence).
➢ Negative debtors' circularization - Request that debtor confirms with the auditor only if the
balance on the statement is not correct (poor audit evidence).
• Positive circularisation provides better audit evidence than a negative debtors’ circulation – if
a negative circulation letter is not returned, it could mean that:
o Debtors' balance is correct, or
o Statement sent to fictitious debtor, or
o Balance is incorrect but in favour of debtor
• Negative debtors' circularization will supplement a positive debtors' circularization - perform
a negative circulation for all the debtors that were not selected for the positive circulation.
ii. Timing of debtor circularization
• Positive circularisation should be done at least two months prior to year-end to allow
adequate time for debtors to reply, as well as the performance of alternative procedures for
debtors that did not reply
 iii. Criteria for selection of debtors positive circularisation
i. Debtors with material balances
ii. Debtors with long overdue debt
iii. Debtors with negative balances
iv. Debtors that opened their accounts during the year
v. Debtors on debtors list with incomplete information, e.g., not a name or address
iv. Debtors' circularisation procedures
• Obtain permission from client for circularisation of debtors
• Auditors reperforms casts of list of debtors and reconciles the total of list of debtors to
balance of debtors control account
• The auditor will use the criteria per iii to select debtors for the positive debtors circulation
• Auditor encloses in the envelope with the statement
o A sticker/letter requesting that debtor confirms directly with the auditor
o Self-addressed envelope (address of auditor)
• Auditor has the duty to supervise the mailing of all debtors statements and
o stamps all envelopes to direct undelivered statements to the auditor's address
• Auditor monitors all replies to the circularisation
o Debtors who disagree statements should be referenced to source documents
o Errors should be analysed to determine the effect thereof on other assertions
o Errors identified through the circularization should be projected to the entire
population of debtors
vi. Alternative procedures for debtors from whom no reaction was received (positive
circularisation)
➢ Perform a second circularisation
➢ Contact debtor telephonically/personal visit
➢ ldentify payments that have subsequently been received from debtor
➢ Confirmation with signed credit invoice/credit application form

b) Subsequent receipts testing

o Inspect the bank statements after year-end to identify payments received from debtors
o Trace the payments to debtors' remittance advices to identify which invoices the payment
is in respect of
o Inspect these invoices and delivery notes to confirm they were included in the debtors'
ledger before year-end
F/S assertion - Completeness
o Selects number of invoices after year-end, obtain supporting delivery notes to ensure goods
were delivered AFTER year-end
o Select last 10 invoices prior to year-end, inspect sales journal and confirm that it was raised as
sales prior to year-end

F/S assertion - Accuracy, valuation and allocation

a) Gross amount
• Review debtors' control account for unusual/exceptional entries and follow-up
• Reconcile the total of the list of debtors to the balance of the debtors' control account,
obtain supporting documentation for any reconciling items
• Reperform the casts of the list of debtors
• Review list of debtors for debtors with credit balances and obtain reasons therefore
• For a sample of debtors, compare the amounts included on the list of debtors to that of
the individual debtor amounts in the debtors' ledger
b) Allowance for credit losses
i. Standard audit procedures
• Enquiry of methods and procedures adopted by management to calculate the allowance
for credit losses
• Obtain the detailed impairment loss calculation schedule from the client and agree the
amount of schedule to general ledger and T/B
• Cast and cross cast the calculations of the schedule
• Assess whether the basis of calculating the allowance is reasonable and consistent with
the prior year
• Inspect the minutes of management meeting for the authorization of the allowance for
credit losses
ii. Assessing the reasonableness of allowance for credit losses
• Reperform the ageing of debtors, by selecting a sample of debtors and tracing the
amounts owed, back to source documents (sales invoices and receipts) to determine
whether they have been allocated to the correct period
• Identify risk debtors like debtors with long outstanding debts, dot discuss with the credit
manager
• Inspection of debtors' correspondence and legal files, to identify disputed debtors and
debtors who have been handed over
• Enquire from management as to any matters that might affect the allowance, like the
relaxing of credit terms
• Compare the actual bad debt write-off during the year, to the prior year allowance for
credit losses to obtain an indication of the company's ability to set a reasonable
allowance
• Perform the following analytical procedures:
o Calculate the allowance for credit losses as a percentage of the total value of
debtors and compare with that of the previous year
o Compare the actual bad debts written off during the year with the amount of the
allowance for credit losses
o Compare bad debt written off during the current year with that of the pervious
year
o Calculate the different categories of the debtors age analysis as a percentage of
the total value of debtors and comnpare with that of previous years.
o Calculate the debtors' collection period and compare with that of the previous
year