## Audit of Trade Receivables – Existence Assertion & Direct Confirmation
### Why This Matters
The key risk for trade receivables is that the debtor balance shown in the balance sheet may not actually exist — balances could be fictitious, duplicated, or misstated. The auditor must gather evidence that every recorded receivable represents a genuine, outstanding claim.
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### Step-by-Step Audit Procedures for Existence
#### 1. Ageing Report Reconciliation
- Obtain the Accounts Receivable Ageing Report as at the period-end date.
- Trace the total balance on the ageing report to the General Ledger.
- Investigate any differences found between the two.
#### 2. Check Realisation – Invoice-Wise Verification
- Verify that each receivable balance is backed by actual invoices (recorded invoice-wise).
- If invoices are not arranged chronologically, check whether they have been properly adjusted.
- For any large outstanding balances, ask management for reasons and justifications.
#### 3. Review Internal Controls over Receivables
Check whether the entity's controls ensure:
- No invoice is recorded twice (duplicate recording risk).
- Receivable balances are automatically generated from the original invoice (reduces manual manipulation risk).
- Receivables relate only to sales or service — not other types of transactions that should not appear in the trade debtors list.
#### 4. Related Party Transactions
For any receivables from related parties, review:
- Whether the transaction was at arm's length (same price as with an unrelated party).
- Whether the transaction was properly authorised by appropriate management.
- The collectability of the balance — is it genuinely recoverable?
#### 5. Analytical Procedures
- Perform analytical procedures to check the reasonableness of balances for all significant accounts.
- Example: compare the receivables balance as a proportion of sales to the prior year.
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### Direct Confirmation Procedures (SA 505 – External Confirmations)
External confirmation is one of the most powerful procedures for existence of receivables.
#### Key Decisions the Auditor Makes:
| Decision | Options |
|---|---|
| Date of confirmation | At Balance Sheet date (most reliable) OR a nearby date chosen by auditor |
| Form of confirmation | Positive (debtor must reply) OR Negative (reply only if they disagree) |
#### Procedure Flow:
1. Auditor requests management's consent to send confirmation requests.
2. If management refuses — auditor evaluates the reason; may perform alternative procedures but must consider if refusal itself is a risk indicator.
3. Confirmation requests are sent directly to the customer.
#### If No Reply is Received (Positive Confirmation):
The auditor must perform alternative procedures:
- Agree the balance to subsequent cash received — if the debtor paid after year-end, the balance is real.
- Detailed analysis of transactions — examine individual invoices, revenue booking entries, and the ledger balance to verify existence.