ACCA F8 Chapter 14 Receivable

7/23/2019 ACCA F8 Chapter 14 Receivable

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Chapter 13

Receivables


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Receivables (ERCV) Existence

The receivable actually exists which is confrmed by the

receivable replyin to the receivables confrmation!

Rights and obligations

The receivable belons to Co! The receivable confrmsthat the amount is owed to "eeley aain by replyin to

the confrmation! Valuation and allocation

Receivables are included in the fnancial statements atthe correct amount # the receivable will dispute any

amounts that do not relate to that account! Cut-of

Transactions and events have been recorded in thecorrect accountin period! The circulari$ation will identi%y

reconcilin items such as sales invoices&cash in transit!


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Receivables Receivables circurlization

'ssumin receivables are material it is importantthat receivable circurli$ation will be carried out! Thismeans writin to the customer and asin them toveri%y the balance!

This is ood %or the extremely ood %or the checinthe existence o% the receivable and its accuracy! tcould well be that the customer who is in trouble willveri%y that receivables exist so as to play the timethey don*t want to arose suspious and +uite aseparate valuation exercise has to be done letter!

There are two types o circurlization

,ositive

-eative


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,ositive and -eative circulari$ation Positive circularization

n a positive circulari$ation you want a reply %rom

everyone who has been written to . whether or notthey aree with the balance!

Two option are there/

0rite the balance and as confrmation "end a blan letter and as them to write the

balance

egative circularization

n the neative circulari$ation you as %or a reply

only i% the balance i% out o% areement! ut how doyou now i% you do not et a reply whether or notthat person aree with balance or whether they

simply have not bothered replyin!


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Receivables

Circulari$ation letter have to be written on the clientsnotepaper and sined by the client! This ives thecustomer permission to disclose confdential in%ormation

to the auditor! 2ere i% the customer o% clients replied tothe client . the client could simply throuh away thoseletters which shows disareement and pass all thoseletters which show areement! That would ive the

auditor +uite a wron impression o% the accuracy o% thereceivables!

Very o%ten stratifcation will allow a lare o% thereceivables balance to be covered by relatively writin

%ew letters! ,erhaps the ey account o% the client willaccount %or 45 o% the receivables balance! n additionsome o% the balances will be selected at random %orcirculari$ation . toether with those balances which hasremoved %or some time . credit balances and perhaps nil

balances!


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Receivables The auditor has to eep a care%ul schedule o%

customer written . replies received. where replies

aree and where they do not aree . where the laco% areement could simply be explained by timindi6erence on payments!

% some o% the client customer do not reply then it isnormal %or the auditor to %ollow up the oriinalletter by letter on the auditor notepaper! % theauditor is really worried about the balance %or whichthere is no confrmation received the auditormiht . as a last resort phone that customer!2owever this can only be done with clientpermission! 7ne o% the last thins auditor should bedoin it to poison the relationship between clientand customer!


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Receivables

Throuh strati!cation a lare proportiono% account receivables can be covered!

Particular categories o receivables"ight be chosen or the sa"ple#

1) 8are or material items!

9) -eative balances

3) -il balances

:) 8on 7utstandin Receivables

;) Remainin randomly selected


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7ther wor on Receivables (R'C) $#Reconcile the some o% balance on the receivables

leder to the control account! The individual balance

represent the individual asset and they have to bere


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7ther wor on Receivables

(# Collection period. that the number o% daysdebtor period calculated it is usually rearded as

very sensitive indicator as to the recoverability o% theo% receivables and also the e=ciency o% credit controloperations! They may o6 course be ood reason whycredit collection period increases/ the companymiht have increased the terms o% sale to becompetitive or it may be main a reaterproportion o% sales abroad where usually thecollection period is loner! ut all other thins beine+ual . an increase in the collection period is usuallyrearded as bad news!

)#*crutiny o board "inutes+lare receivableswhich loo as thouh they miht be oin bad shouldbe re


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7ther wor on Receivables

,# ait i possible . or pay"ent! >inally an absoluteproo% that receivable is ood . is i% it is received a%ter

year end! ?uite o%ten i% there is a material amount o%due . auditors will try and delay sinin the auditorreport until the amount is received! % it is not receivedmay be a%ter two or three months then . then there maybe serious doubts as to the recoverability o% thatamount and some sort o% provision is be set up!

/# *crutiny o credit notes issued ater the yearend is very important! % is possible %or the company todebit and receivable account and credit sales @ust

be%ore the year end and then very early in the new yearto reverse that transaction by issuin credit notes! Thisives the company a mechanism to boost up its incomeand proft %or the year which is then +uietly reversed

out!


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7ther wor on receivables

01 "elect a sample o% oods dispatched notes(AB-) be%ore and @ust a%ter the year end and %ollow

throuh to the sales invoice to ensure they arerecorded in the correct accountin period/ verifescompleteness and existence (cuto6 o% revenue)!

21Review a sample o% post yearend credit notes to

identi%y any that relate to pre yearend transactionsto ensure that they have not been included inreceivables/ verifes existence (occurrence o%revenue)!

$31 "elect a sample o% yearend receivablebalances and aree bac to valid supportindocumentation o% AB- and sales order/ verifesexistence!


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7ther wor on receivables

Review a%ter date cash receipts and%ollow throuh to pre yearend receivablebalances

Calculate averae receivable days andcompare this to prior year. investiate

any sinifcant di6erences

nspect the aed receivables report to

identi%y any slow movin balances.

discuss these with the credit controlmanaer to assess whether an allowanceor write down is necessary


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,ractice +uestion

ou are the audit manaer in chare o% the audit o%uilders Date. a limited liability company! The

company*s year end is 31 Darch. and uilders Date hasbeen an audit client %or three years! uilders Date sellssmall tools. plant and e+uipment exclusively to thebuildin trade!

They have 19 warehouse style shops locatedthrouhout the country! uilders Date does notmanu%acture any products themselves! The auditfeldwor is due to commence in 3 wees time and youare preparin the audit wor proramme %or the trade

receivables section o% the audit! Extracts %rom theclients trial balance show the %ollowin in%ormation!

Trade receivables control account 19:.;55

Aeneral trade receivables provision (9.:5)

"pecifc trade receivables provision 5


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,ractice +uestion

>rom your review o% last year*s audit fle you havedetermined that last year there were 9 specifc

provisions o% F; and F9 as well as a 3 eneralprovision!

nitial conversations with the client indicate that thereare no specifc provisions that are to be made this year

however they intend to reduce the eneral provision%rom 3 to 9! ou are aware that two o% uildersDate*s ma@or customers went into administrationdurin the year and they are liely to be li+uidated inthe near %uture! oth o% these customers owedmaterial amounts at the yearend!

Re4uired

Bescribe substantive procedures the auditor shouldper%orm on the yearend trade receivables o% uildersDate!


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,ractice +uestion ('nswer)1) Trace and aree the receivables balances on the trial balance

to uilders Date*s accountin system and the dra%t fnancialstatements!

9) Confrm the trade receivables control account balance matchesthe sum o% the individual trade receivables leder accounts!

3) >or a sample oods dispatched notes around the yearend traceto the sales invoice and leder accounts to ensure that thetransactions have been recorded in the correct accountinperiod!

:) Cast a sample o% trade receivable leder accounts to confrmarithmetical accuracy!

;) "elect a sample o% individual trade receivables and per%orm a

direct confrmation test usin a positive confrmation letter!G) Recalculate the eneral provision based on the 9 fure to

ensure arithmetical accuracy!

H) Biscuss with the uilders Date manaement why the eneralprovision has reduced %rom 3 to 9 and assess the

reasonableness o% the explanations provided


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,ractice +uestion ('nswer)

7btain or prepare an aed receivables analysis toidenti%y aed debts that may re+uire a specifc provision!

Biscuss with manaement any such balances and ensurespecifc provisions are made i% appropriate!

Trace and confrm that the specifc provisions made in theprior year were either written o6 or the cash wasrecovered in the current accountin period!

Biscuss with manaement the reason %or not mainspecifc provisions %or the two customers in administration

who owe material amounts at the yearend!

Consider and discuss with manaement the potential

implications o% %ailin to mae specifc provisions on theaudit opinion!

Compare a sample o% individual trade receivables to theirprior year balance and investiate any unusual or

unexpected chanes between the balances!


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Befnition &ccounts Receivable 5aysis an accountin concept related to

'ccounts Receivable! t is the lenth o% time it taes to clear all'ccounts Receivable. or how lon it taes to receive the money

%or oods it sells! This is use%ul %or determinin how e=cient thecompany is at receivin whatever shortJterm payments it isowed!

'verae accounts receivable'nnual sales K 3G; days

Receivable aging analysis

% an accounts receivable ain demonstrates that a companyLsreceivables are bein collected much slower than normal. this isa warnin sin that business may be slowin down or that the

company is tain reater credit ris in its sales practices!

's a manaement tool. accounts receivable ain may indicatethat certain customers are not ood credit riss! t can there%orehelp a company mae prudent decisions about whether or not to

eep doin business with customers that are chronically latepayers!


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Befnition

8ist o% balances

"ale day boo "ales & receivable leder control account

Entry is made in the fnancial statements

ACCA F8 Chapter 14 Receivable

Documents

Transcript of ACCA F8 Chapter 14 Receivable