# Audit of Trade Receivables

## Importance of Tests of Controls (TOC)

It is important to carry out TOCs for checking effectiveness of internal controls over sales as part of debtors' audit procedure.

## Key Considerations for Trade Receivables

Only bona fide sales lead to trade receivables
All sales made to approved customers
All sales properly recorded in BoA
Once recorded, debtors can be settled only by receipt of cash
Segregation of duties at every point in sales transaction
Debtors are collected on time
If not collected in time - reminders sent and legal actions taken
Balances are regularly reviewed
Proper system of follow up exists

## Audit Procedures by Assertion

### Existence

Check whether controls ensure invoices cannot be recorded more than once.
Ask for period-end ageing report and trace balance as per report to general ledger.
Check whether realization is recorded invoice-wise or not.
If any large balance is due for long time, auditor should ask for reasons.

### Direct Confirmation Procedures (Part of Existence)

Significant audit activity is to contact customers directly and ask them to confirm amounts of unpaid A/c receivable.
Auditor employs direct confirmation procedure with consent of the entity.
Trade receivables may be requested to confirm balances either:
(a) as at date of Balance Sheet, OR
(b) as at any other selected date
Form of confirmation may be either:
Positive confirmation request (customer asked to reply whether agrees or disagrees)
Negative confirmation request (customer asked to reply only if disagrees)

### Completeness (Cut-off Procedures)

Auditor needs to satisfy himself of cut-offs. Without cut-off, sales could be understated or overstated.

Cut-off procedures:

For invoices issued during last few days (last 5 days) of year, check that goods are dispatched and not lying with the company.
Ensure that all goods dispatched prior to year-end are invoiced and included in debtors.
Ensure that no goods dispatched after year-end have been invoiced and included in debtors for the period under audit.

### Valuation

Review process followed by company to derive an allowance for doubtful accounts.
Obtain ageing report of A/c receivable.
Obtain list of debtors under litigation and compare with previous year.
Scrutinize analysis and identify those debtors which appear doubtful - discuss with Management.

Worked example

### Example 1

Example - Cut-off issue (overstated sales): ABC Ltd recorded an invoice dated 30 March 2026 for Rs. 5 lakhs in FY 2025-26, but goods were physically dispatched on 5 April 2026. This is a cut-off violation - sales and debtors are overstated by Rs. 5 lakhs. Auditor must propose adjustment to defer this sale to FY 2026-27.

### Example 2

Example - Positive vs Negative confirmation: A confirmation request to customer P (balance Rs. 10 lakhs - large/high risk) is sent as POSITIVE confirmation (response mandatory). A confirmation to small customer Q (balance Rs. 5,000 with reliable payment history) may be sent as NEGATIVE confirmation (reply only if disagreement). The auditor's choice depends on materiality and risk assessment.

### Example 3

Example - Doubtful debt provision: XYZ Ltd's ageing report shows Rs. 50 lakhs due for over 180 days from a customer in financial distress. Last year's provision was 50% of such balance. Auditor reviews if 50% is still appropriate given current debtor health or whether full provision is now warranted.

⚠️ Common exam mistakes

Performing direct confirmation procedures without obtaining consent of the entity - this is a procedural prerequisite
Confusing positive and negative confirmation - negative is used when risk is low and population is large with small balances
Not performing cut-off procedures for both sides (dispatched but not invoiced AND invoiced but not dispatched)
Relying only on ageing reports for valuation without scrutinizing specific doubtful debtors and litigation status
Not obtaining a separate list of debtors under litigation - this is high-risk for non-recovery

Reference:

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