## Audit of Trade Receivables – Valuation
The valuation assertion for trade receivables asks: Are debtors stated at the net amount expected to be collected (net realisable value)?
This requires adequate provisioning for bad and doubtful debts.
### Audit Procedures
Step 1 – Understand the Allowance Process
- Review the company's methodology for computing allowance for doubtful accounts.
- Compare with the method used in the prior year (consistency check).
- Assess whether the method suits the current business environment.
Step 2 – Obtain and Analyse Ageing Report
- Obtain the debtors ageing report (both debit and credit balances separately).
- Identify debts beyond credit terms — these are potentially doubtful.
Step 3 – Litigation List
- Obtain the list of debtors under litigation.
- Compare with the prior year list to check for new additions or unexpected removals.
Step 4 – Discuss Doubtful Items
- Identify debtors appearing doubtful from the ageing analysis.
- Discuss with management why they are not included in the provision for bad debts.
- Perform further testing where disputes exist.
Step 5 – Verify Provisioning Rates
- Check that provisions are made at appropriate rates considering actual recoverability.
Step 6 – Movement Schedule
- Prepare a schedule of movements in the bad debt provision account and debts written off.
- Compute bad debt expense as a % of sales and compare with prior years to assess reasonableness.
Step 7 – Write-off Authority
- Check that write-offs of receivable balances are approved by an appropriate authority (e.g., Board of Directors for a company).